How to optimize mutual fund portfolio is the most common question being asked these days! Mutual fund portfolio optimization is gaining good attention from retail investors as over the last few years, mutual funds have come to prominence among a broad segment of individual investors.

The main factors for this are mainly the compelling returns produced by mutual funds, whether debt or equity, and the shrinking returns offered by fixed deposit and fixed income schemes as a result of the low interest scenario that prevailed for the majority of the last decade.


How to optimize mutual fund portfolio?

Given the current state of the market, it is important to protect your financial well being and track your mutual fund investment portfolio. Else, you will not be able to build wealth efficiently or achieve the financial goals you set.

Rebalancing and optimizing your mutual fund portfolio should be done once in a while. You can either do so on an annual basis or in case your mutual fund portfolio appears to be significantly out of line with your financial objectives.

Several investors are still puzzled by the terms rebalancing and optimization, both of which refer to the appropriate management of a mutual fund portfolio and re-aligning them. Let us understand the difference between portfolio rebalancing and portfolio optimization first!

Difference between rebalancing and mutual fund portfolio optimization:

Portfolio rebalancing is the process of modifying the asset composition of your investment portfolio in terms of the factors discussed previously. Although the aim of a portfolio rebalancing is to alter the investment course and rebalance the portfolio’s components, the intention is to beat the inflation in long run by keeping the best and most suitable assets across each asset class which can support you in achieving your financial objectives like child education planning, retirement planning, marriage planning etc.

Portfolio Rebalancing Example:

Suppose you wish to create a mutual fund investment consisting of 80% equity investments and 20% debt investments and you made an asset allocation decision maintaining this proportion of equity and debt at the time of your purchase, you will need to review whether the portfolio is in sync with this ratio.

After a year, in case, your portfolio shows 85% equity and 15% debt, it goes out of sync and you will need to rebalance your portfolio to restore the asset allocation to 80% equity and 20% debt. If your equity allocation surpasses 80% in a year; you ideally sell equity and purchase debt to maintain your target asset allocation.

Similarly, if the equity percentage fell below 80%, you sell debt and purchase equity to maintain a 20% asset allocation. However to optimize the mutual fund portfolio, this rebalancing should be done with the help of experts.

Mutual Fund Portfolio Optimization:

To understand optimization, let’s assume that you carefully pick some mutual funds based on various factors such as past performance, reviews etc. 

However, what does an investor can do if a particular mutual fund begins to underachieve?

However, what does an investor can do if a particular mutual fund begins to underachieve? What would you do if a part of your car does not work properly? You either repair it or replace it! 

If it’s just a car, you still have the choice of having it repaired by a mechanic. However, you do not have ownership of a mutual fund as your money under a specific mutual fund is managed by AMCs and fund managers. As a result, you will be unable to rebuild your mutual fund assets allocation.

What is the solution? The second best option is to get it replaced!

The best part about mutual fund investment is that there are many choices both overall and within segments. 

Thus, if one of your mutual fund investments begins to perform poorly, you can easily replace it with some other scheme which comes under optimization of your portfolio.

If you are not sure as to what should be the appropriate frequency for portfolio optimization, we can help you! We keep a close watch on our client’s portfolio and regularly rebalance it to optimize mutual fund portfolio based on their financial goals.

This is just a basic explanation of investment optimization. Just like you avoid self medication and always talk to a doctor to discuss your health issues, you can always talk to us so that we can review your portfolio and take corrective actions.

Strategies to optimize mutual fund portfolio:

Routine analysis of the mutual fund portfolio periodically is just as necessary as investment. This enables you to monitor your funds’ output in various market environments in contrast to other asset classes as well as to check whether your investment objectives are on track or not. 


Bear in mind that funds with exceptional yields in history can underperform in the short run. That is why regular review of investment portfolio is very crucial. A mutual fund investor can think about switching the current funds if they have consistently underperformed over the last three years.

Set your financial goals:

According to experts, it is prudent to align the portfolio to a properly planned financial objective that lists your multiple life aspirations as a sort of investment blueprint. Not only does this encourage you in maintaining investment consistency, but it also efficiently integrates the investment portfolio with the financial objectives to maximize the returns and to optimize mutual fund portfolio.

Investing without goal based planning exposes you to frequent, unintended redemption from your Mutual Fund holdings, starving you of the possible momentum provided by potential capital appreciation through power of compounding on your returns.

An experienced mutual fund distributor can assist you to optimize mutual fund portfolio by intelligently aligning your Mutual Fund portfolio with your different financial objectives. The advantages of doing so are unquestionable.              

Diversify your mutual fund portfolio:

The gains provided by mutual fund investments vary significantly on the basis of a number of factors such as the investment choices by the fund manager, blend of asset classes they choose to invest, the circumstances in which they invest your money, the financial market situation and many more. 

For instance, certain types of investments such as investment in equity exhibit somewhat opposite connections as compared to equity investments when it comes to the market, exhibiting a negative correlation with one another. Gold funds typically perform better during financial uncertainty, while equity mutual funds typically underperform during such periods.

Likewise, short term debt mutual funds show inversely proportional correlation under increasing interest environments. Short term debt mutual funds outperform long term debt mutual funds during such situations. 

Therefore, a well-diversified mutual fund portfolio that is optimally associated with a blend of mutual funds spanning across various fund houses and asset classes will ultimately generate the best rate of returns based on an investor’s risk tolerance and to optimize mutual fund portfolio to reach your financial goals.  

Even so, an investor must prevent taking diversification decisions on their own and consult a specialist like a mutual fund distributor before working on re-balancing of mutual funds or optimization of mutual fund portfolio as it can avoid over-diversification.

Retail investors should also avoid buying too many mutual funds as such funds can complicate tracking their success and can even have a detrimental effect on investor’s entire mutual fund portfolio optimization.

The majority of investors, particularly entry level investors, are unaware about how to optimize mutual fund portfolio as they know little about the importance of diversification and asset allocation.

Although it is evident that asset allocation is less important when entering mutual fund investments with a low monthly Systematic investment plan (SIP), it becomes incredibly valuable as your portfolio gets stronger.

Choose SIP way:

If you really want to optimize mutual fund portfolio, Systematic Investment Plan (SIP) is the best route to take. Due to the saving discipline it offers, SIP is the most preferred choice of majority of mutual fund investors. SIP allows you to invest a fixed sum of money on a regular basic.

An investor can set the investment frequency as daily, monthly or even quarterly. If you are entry level investor and compare mutual funds vs stock market investments, equity linked mutual fund SIP schemes provide better returns with less monitoring.   

Once an investor decides the sum and investment frequency, the amount gets automatically debited from the saving account promoting consistent investment behavior. An investor can invest as low as Rs. 500 per month to start with mutual fund investments. Regular automated monthly investment helps to gain benefit from rupee cost averaging over the long run.

An investor can purchase extra mutual fund units at lower NAV during bearish movement through SIP which helps in averaging of cost and optimizing the mutual fund portfolio.

Keep making regular investments:

Sharp price falls, such as the one caused by the coronavirus crisis during March and April of last year, prompted several investors to pause their SIPs in anticipation of further bear markets. Fortunately, sudden market crashes and cycles of financial crisis provide ideal opportunities for long-term economic growth. It enables fund managers to acquire high-quality stocks at unbeatable prices.

Therefore, investors who regularly invest in equity linked schemes should not only continue their SIPs during market volatility to optimize mutual fund portfolio by averaging purchase costs, but also attempt to top-up their SIP contributions with higher transactions to additionally average out their investment costs.

This would allow building substantially larger wealth at much smaller contributions and chances are that an investor can achieve his or her financial goals even before the set time horizon.

Choosing between Direct Vs Regular Mutual Funds:

While making mutual fund investment decision it is very crucial to understand which mutual fund investment plan is best for you on the basis of expertise in investment. Asset Management Companies offer investors to invest in mutual funds through two different ways, direct and regular mutual fund plans.

It is important to compare direct and regular mutual fund plans as both work differently for individual investors.

In direct mutual funds, an investor needs to use his or her own financial knowledge to make right investment choices while in regular mutual funds, you get expert guidance from mutual fund distributors which is important for you to meet your financial goals.   

Maintain a risk balance:

Diversification criteria are always different for each investor as every investor has unique financial goals. Diversification strategy also depends on a number of other parameters such as the age of the investor, the risk tolerance, investment horizon and expected rate of returns.

For example, if an entry level investor who is young and wants to optimize mutual fund portfolio should allocate more funds of his or her portfolio to equity linked mutual fund schemes, while an old investor who is nearing his or her retirement age must opt for more secure and fixed income mutual fund schemes such as debt funds.

The bottom line is that the investment portfolio should be appropriately spread through various schemes to maintain a proper balance and investors should avoid the most common mutual fund investment mistakes right from the beginning of investment journey.

For example, assume you are an entry level investor at a young age and you have allocated around 70% of your total mutual investment to equity mutual funds while 30% allocation goes to debt mutual funds.

So, rather than investing the entire money in a specific equity mutual fund scheme, the money should be distributed across a variety of equity mutual funds targeting small, mid, as well as large-cap mutual fund schemes based on your investment goals.

There should be a proper balance risk across your asset allocation to optimize the mutual fund portfolio. The allocation of funds to various asset classes should be consistently adjusted across the investment time frame in response to the market correction and your risk tolerance.

Mutual fund investment is subject to market risk, read scheme related documents carefully before investing.

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Mutual fund investment is subject to market risk, read scheme related document carefully before investing.