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Which funds should I liquidate while rebalancing the portfolio?

Dhirendra Kumar explains how you should go about rebalancing your portfolio

While rebalancing the portfolio or booking profit from equity funds, should I liquidate the funds that have performed poorly or the ones that have given good returns?
- Virendra Gupta

If your portfolio is made up of good funds, you should not be selling just any of the losers. For instance, if your portfolio consists of four funds- two growth funds, one international fund, and one value fund. Then if the value fund is not doing well, you should not sell it. That's because the entire category has not done well and not just the particular fund. In a nutshell, if your portfolio is made up of good funds, sell each fund proportionately for rebalancing. However, if your portfolio has any fund in which you would not like to invest anymore, that is the fund you should sell completely for rebalancing.

The other way of rebalancing is by deciding the asset allocation. For instance, you want to keep 75 per cent of your portfolio into equity and 25 per cent into fixed income. Now of that 75 per cent, if for instance, the small cap has gone up dramatically in a particular year, as small caps tend to run in a brief period while struggling to perform for many years. Thus, when the small caps experience a bull run, it would be appropriate to trim their exposure to maintain a spread of investments in various categories in a constant proportion.

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