How to rebalance your SIP portfolio smartly

When and why should you rebalance your SIP portfolio?

Investing in mutual funds through an SIP plan is a suitable way to build long-term wealth. It allows you to invest regularly, take advantage of market ups and downs, and stay disciplined. However, once you start investing, it’s not something you should forget about completely. One important aspect of maintaining a healthy investment portfolio is rebalancing.

In this article, we’ll explain what rebalancing means, why it matters for your SIP portfolio, and how you can do it in a simple way.

What is rebalancing?

Rebalancing means adjusting the proportion of your investments, so they stay aligned with your financial goals and risk tolerance. Over time, some parts of your portfolio may grow faster than others. For example, if equity markets perform well, the value of your equity mutual funds might rise more than your debt funds.

This shift can change the overall balance of your portfolio. So, if you originally planned to invest 70% in equity and 30% in debt, that might become 80-20 after a year or two. Rebalancing helps bring your investments back to the original (or updated) ratio.

Why rebalancing is important

Let’s look at why rebalancing your SIP portfolio matters:

1. Keeps your risk in check

Every investor has a different level of comfort with risk. Maybe you’re comfortable with moderate risk, so you choose 60% equity and 40% debt. But if equity markets rally, your equity holding might increase to 75%. That’s more risk than you originally intended.

Rebalancing brings the risk level back to what you’re comfortable with.

2. Locks in gains

When one part of your portfolio performs well, you can take some of those gains and shift them to the lower-performing part. This helps you lock in profits while also buying low in other areas.

It’s a disciplined way to follow the classic advice: ‘Buy low, sell high.’

3. Improves long-term returns

Staying invested in a lopsided portfolio can reduce long-term returns or increase the chances of losses during market corrections. Regular rebalancing helps your portfolio stay healthy and aligned with your goals.

4. Reminds you to review your goals

Rebalancing gives you a chance to stop and think: are your financial goals still the same? Maybe your salary has increased, or you have new responsibilities. Revisiting your SIP plan during rebalancing can help you make adjustments if needed.

When should you rebalance your sip portfolio?

There’s no one-size-fits-all answer, but here are a few common approaches:

1. Time-based rebalancing

This means you rebalance at regular intervals, like once a year or once every six months. It’s simple, and you don’t have to track your portfolio every day. Many investors choose to rebalance at the start of a new financial year.

2. Threshold-based rebalancing

In this method, you set a limit, say 5% or 10%, and if your portfolio goes beyond that, you rebalance. For example, if your equity allocation was meant to be 60% but becomes 68%, you shift some funds back to debt to restore balance.

3. Event-based rebalancing

Major life events like marriage, buying a house, or the birth of a child can change your financial needs. These are good times to review and rebalance your portfolio.

How to rebalance your SIP portfolio

Rebalancing doesn’t have to be complicated. Here’s a step-by-step way to do it:

Step 1: Review your portfolio allocation

Look at your current asset mix – how much is in equity funds, debt funds, hybrid funds, etc. Compare it with your target allocation based on your SIP plan.

Step 2: Identify the gap

Is any part over-allocated or under-allocated? For instance, if equity is 75% and it should be 65%, that means you need to shift some funds.

Step 3: Take Action

You can do one or more of the following:

● Stop or reduce SIPs in over-allocated funds temporarily.

● Increase SIPs in under-allocated funds.

● Redeem some units from over-allocated funds and reinvest in others.

● Use Systematic Transfer Plans (STPs) to shift funds gradually from one scheme to another.

Step 4: Use an SIP Calculator online

An SIP calculator online can help you estimate how changes in your monthly contributions or asset allocation will affect your long-term returns. It’s a simple way to check if your rebalanced portfolio is on track to meet your goals.

Things to keep in mind

Don’t rebalance too often. Small changes in the market are normal. Rebalancing every few months may create unnecessary costs or tax impact.

Look at fund performance too. While rebalancing is about asset allocation, it’s also a good time to check if your mutual fund schemes are performing well.

Avoid emotional decisions. Sometimes markets fall sharply, and you may want to exit equity completely. But that’s not rebalancing, it’s reacting. Stick to your plan.

In conclusion, rebalancing your SIP portfolio is like regular health check-ups - not exciting, but very important. It helps you control risk, stay on track with your goals, and make wise investment decisions.

You don’t need to rebalance every month. But checking in once or twice a year, and making small changes as needed, can make a big difference over time.

And don’t forget - an SIP calculator online is a handy tool that can guide you in planning better and rebalancing wisely.

If you’re serious about building long-term wealth through mutual funds, remember that starting an SIP plan is just the beginning. Staying consistent and reviewing your investments regularly is what turns effort into potential long-term gains.