A balanced portfolio comprises a mix of stocks, bonds, and various assets, designed to balance risk against potential returns. It proves beneficial for investors seeking long-term wealth growth while effectively managing risk and being comfortable with temporary market fluctuations.
Building a balanced portfolio is a science involving calculated risks but also an art requiring careful consideration.
This article will help you in your journey to build a balanced portfolio so that you can comfortably reach your financial goals.
What is a balanced portfolio?
Having a balanced portfolio means having a holistic investment strategy that aims at delivering the right mix of investment in terms of growth and returns.
A balanced portfolio's chief objective is to ensure diversification through optimum asset allocation in new, growth and mature products to spread out financial risk.
Benefits of a balanced portfolio
It is healthy to have different asset classes of products since no one asset will give you good returns exponentially.
- Helps manage risk: Exposure to different asset classes in a balanced portfolio makes it less likely to be affected by market fluctuations.
- Growth opportunities: A healthy mix of assets ensures you have varying risk-return profiles that promote growth and reduce risk.
- Stable returns: Having safe debt instruments, bonds in a balanced portfolio give steady returns, helping mitigate extreme fluctuations in value.
- Helps with capital preservation: A balanced portfolio supports long-term wealth growth by ensuring a steady, disciplined approach to investing that can withstand market ups and downs.
- Customizable and flexible: A balanced portfolio gives investors the freedom to design a portfolio keeping in mind their financial goals, timeframes and ambitions like retirement, children’s education etc.
How to balance your portfolio using mutual funds?
You can build a balanced portfolio by using the Product Portfolio Matrix, commonly known as the BCG growth-share matrix which aims to maximise gains and minimise losses.
Using this framework you can build a winning combination of mutual fund products to meet your financial objectives.
| Product mix | Question Marks | Stars | Cash Cows | Pets or Dogs |
| Nature | These consist of mutual funds that have high growth potential but an uncertain future. These may require further evaluation and monitoring. | Stars are mutual funds with high-growth potential and strong performance. They are typically leaders in their category and have a high market share. | These are mutual funds with stable performance and consistent returns. They may not exhibit high growth potential but provide steady income. | Mutual funds with low market share and growth potential. These may require reassessment or divestment if they do not perform well. |
| Example of mutual funds | Emerging market equity funds, Small-cap equity funds where companies lack established track records | Large Cap Funds, Thematic Funds | Mid Cap Funds, Sectoral Funds | Small Cap Funds, International Funds |
| Strategy to follow | Monitor closely for any changes in market conditions or fund performance | Diversify to mitigate risk and balance potential volatility. | Continue to invest in high-performing funds with solid track records. | Hold for income generation or as a stable component of the portfolio. |
Tips to build a balanced portfolio
A balanced portfolio is defined as a combination of cash, stocks and bonds - that give you good returns but also provide you with safety.
1. Determine your investment goals and objectives
The first step to building a balanced portfolio is to determine which financial obligation you want to meet through this investment. It could either be planning for your child’s education, planning your retirement or buying real estate.
Set realistic expectations for your risk tolerance
2. Take into account your risk appetite
Understand how comfortable you are with taking risks with your capital. If you are a conservative investor, opt for less volatile investments like bonds. But if you have a good risk appetite go for stocks that offer higher returns with a high risk profile.
3. Choose the right asset allocation and diversify
The next step is to find the right asset classes amongst stocks, bonds or cash that complement your investment objectives. If you are a young investor you can take more risks with your capital and opt for stocks but if you are a senior citizen your aim should be capital preservation.
4. Diversification of portfolio
Diversifying your portfolio means deploying your resources across various asset classes to minimise risk. As a young investor, investing all your money in high-growth equity can seem tempting but sudden market fluctuations can lead to losses. Hence it is wise to also diversify a considerable amount in a combination of government bonds, corporate bonds, exchange-traded funds, or index funds.
5. Rebalance your portfolio
Since change is the only constant when it comes to financial markets it is important to regularly monitor your portfolio. If you are too invested in just one asset class, distributing some of the capital to an under-invested asset would be advisable. It is ideal to rebalance your portfolio once or twice a year.
How and when to rebalance a balanced portfolio
Rebalancing a balanced portfolio means bringing the allocation of equity, debt, and gold back to its original or desired level after market movements have caused it to drift. Here is how and when to approach it:
- Set a target allocation first: Decide your ideal split between equity, debt, and gold based on your financial goals and risk appetite — for example, 60:40 equity-to-debt — before you begin investing. This becomes your rebalancing benchmark.
- Check for significant deviation: Do not rebalance for minor fluctuations. Initiate the process only when any asset class deviates by at least 5 percentage points from its target allocation. Smaller deviations rarely justify the tax implications or transaction costs involved.
- Review at least once a year: Checking your portfolio annually is a practical approach for most investors. Regular reviews ensure that no single asset class silently takes over your portfolio due to prolonged market rallies.
- Reduce the over-performing asset, increase the underperformer: If equity has surged and now forms a larger share than intended, book partial profits and redeploy into debt or gold. This disciplines you to sell high and buy low — without trying to time the market.
- Use fresh investments to rebalance smartly: Rather than redeeming existing units immediately, consider directing new SIP contributions or lump sum investments into the underweighted asset class to minimise exit loads and tax outgo.
- Factor in taxation before redeeming: Redemptions from equity funds held under one year attract short-term capital gains tax. Plan rebalancing around holding periods to reduce unnecessary tax liability.
- Keep exit load periods in mind: For each SIP instalment, track the investment date individually. Redeeming within the exit load period reduces net proceeds and defeats the purpose of rebalancing.
- Use a portfolio rebalancing calculator: Tools like PrimeInvestor's rebalancing calculator help you determine exactly how much to invest or redeem from each asset class, removing guesswork from the process entirely.
Conclusion
A balanced portfolio requires significant investment not just in capital but also effort and time. Understanding the market dynamics and keeping track of trends will help you make informed decisions to make the most of your investment.
Being mindful of your financial ambitions, investing and diversifying into the right asset classes and then rebalancing those periodically helps to build a balanced portfolio in the long run.
If you want to build a balanced portfolio and identify potential star investments or find suitable replacements for your declining cash cow mutual funds, consider diversifying across various high-growth funds and regularly reassessing your portfolio.
The Bajaj Finserv Mutual Fund platform can be your trusted ally in your investment journey. The convenient and easy-to-use Bajaj Finserv Mutual Funds Platform boasts over 1,000 mutual funds schemes. It also allows for easy mutual fund comparison and selection, making it an excellent resource to help you build a balanced portfolio.
