It is imperative to manage your long term wealth creation process with caution. For starters, it may seem like a very long duration to adjust or make the desired changes (if required), but in reality it is late when we realize there isn’t much time to take corrective actions. Being proactive is better than making changes as a reactive measure. Investing in mutual funds should clearly define your objectives and the risk that you are willing to assume.
One can alter their portfolio of mutual funds either by the way of rebalancing, or through a complete revamp. A radical shift in objectives along with being dissatisfied with the fund performance is the primary reason for change in portfolio. An investor can even initiate a change if there are negative returns, which may not be the actual case.
Rebalancing is the maintenance part of mutual fund investing. Being a fairly simple process, one needs to time it perfectly to gain advantage from rebalancing their portfolio. If you give the analogy of a car, it is equivalent to general repairs and maintenance. Mutual funds NAV are cyclic in nature and move according to the volatility in the market. At such times, rebalancing the portfolio might not be the best move when the mutual funds NAV are at the lowest. The factors due to which mutual funds were opted need to be assessed to understand whether there is a need for change. Frequently reviewing the portfolio may lead to taking wrong decisions too.
On the other hand, you can completely change the portfolio of your mutual funds to keep up with the changing time frame of your objective and risk appetite. Other factors like underperformance of the fund or the mutual funds being inappropriate for a desired investor’s strategy can lead to an overhaul of portfolio.
Identification of the strategy the fund is adopting is crucial in understanding whether the investor’s financial objectives shall be met or there needs to be a change in portfolio. Mutual funds are often changed as a reason of underperformance. This phenomenon is experienced by all which is mainly due to the volatile conditions that prevail in the markets. Your fund can be compared with relevant industry benchmarks to gauge the performance levels. Some funds may not be suitable to your risk tolerance and at times may be overweight. Overweight funds are those that require higher asset allocation than average. This subjects the portfolio more volatility in the markets.
To conclude, any changes or alterations in mutual funds shall be brought only after objectively reviewing the portfolio at specified intervals. The premise and analysis on which the investments continue to hold true should be monitored to make any timely changes.