Here's all you need to know about Mutual Fund Automated Rebalancing System

MARS is an automated portfolio rebalancing tool that disseminates timely reminders to clients and partners to rebalance to the original strategic asset allocation.

Here's all you need to know about Mutual Fund Automated Rebalancing System

Investing in appreciating assets is a time-tested way of multiplying your earnings over the long term. Every investor wishes to maximise their returns and minimise the risks involved. A prudent and well-informed investor would do so by asset allocation and superior scheme selection. 

A critical question is: can a profitable and fundamentally sound business stay profitable till perpetuity? The answer is uncertain. Therefore, to mitigate the risks of changing fundamentals and to cope with business dynamics, regular review and rebalancing of the portfolio is a must. This will enable investors to regularly revamp the asset allocation, based on the changes in market dynamics and the business environment. It can also help align their long-term expectations to their aspirational goals.

Some common questions from investors are inevitable, such as: What is rebalancing? Is there a need for rebalancing? How often should one do it? What are the strategies?

What is rebalancing of investment portfolio and why is it important?

Rebalancing refers to bringing the investment allocation to various asset classes back to the original investment allocations as per the investment policy statement (IPS). This is required because most of the time, some asset classes perform invariably better than other assets. 

For instance, a large-cap mutual fund might outperform a multi-cap mutual fund. Because of their performances, the proportion of investment (in market value terms) changes disproportionately when compared to the strategic asset allocation as per the IPS after a period of time.

Sounds easy? Well, it’s easier said than done. It might prove to be difficult for retail investors to make these changes because of limited access to resources. The investor is further bothered by issues such as when and how to rebalance, what is the right strategy to follow etc. 

Related: Portfolio rebalancing: Boon or bane for investors?

This is where a mutual fund automated portfolio rebalancing system (MARS) comes into the picture. 

What is MARS?

MARS is an asset allocation and scheme selection tool that is built on solid NJ research for a smooth and automated rebalancing of portfolios. It gives clients a wide range of diversified portfolios to choose from, depending on their investment goals and risk appetite. Since the rebalancing is system-driven, it eliminates behavioural biases as well. System-driven reminders are sent to clients and partners regarding the timing of rebalancing. 

MARS offers two broad sets of asset allocations:

  • Dynamic asset allocation portfolio: The asset allocation between equity and bond funds varies depending on the equity market scenario, valuations, and economic growth indicators – the higher the market risk valuation, the lower the allocation, and vice versa. Rebalancing is generally done every quarter. The dynamic approach allows investors to choose from a wide range of baskets depending on their risk appetite. Portfolios are primarily classified as Aggressive (larger exposure to equities), Moderate (moderate exposure to equity; maximum 60%), and Conservative (larger exposure to debt; minimum 70%).
  • Fixed asset allocation portfolio: In this case, the asset allocation between equity and debt funds would be fixed in the beginning and rebalanced annually.

Related: Can you beat the slowdown with SIPs?

How to get started: Operations and compliance

The minimum amount for opening a MARS account is Rs 1 Lakh. However, investors can add more funds to their existing portfolio. The minimum investment for top-up is Rs 10,000. MARS is a direct plan offering, so there’s no need to open a separate trading account or demat account. An existing account can be used. 

Further, MARS is more like an advisory tool for strategic asset allocation and scheme selection. Therefore, there is no specific restriction to sell the securities under MARS,;that is, no lock-in. Further, there are no extra charges associated with enrolling for MARS. 

What securities are covered under MARS?

Since automatic rebalancing would require buying and selling of existing investments to justify the strategic asset allocation, securities with a lock-in or securities that lack liquidity shall not be covered under MARS. E.g. fixed maturity plans, closed-end equity funds, ELSS schemes (units under lock-in), and schemes having pledge units.

Related: Consider these factors before you redeem your mutual funds

Account related questions: Operations

A client can switch between MARS portfolios. However, only one switch can be done in a calendar year. There is currently no charge for a portfolio switch. Standard transaction charges on the exchange platform will apply as per the agreement between the client and the partner.

If the client fails to authorise the rebalancing transactions, they will have to wait for the next rebalancing cycle for the auto change in their portfolio. However, the client always has the option of rebalancing the portfolio themselves by transacting between the schemes. Again, there is no lock-in under MARS.

In case the client wants to discontinue the MARS service, they have to intimate the partner for the same. The partner can then uncap the client from MARS through the Partner Desk. The client will stop getting any future alerts for rebalancing their portfolio. The client can also opt for a partial redemption in MARS. The redemption amount will be proportionately covered from all the schemes to stick to the asset allocation.

So there you have it – all the information about MARS and the investment options available with it. It has the capability to capture the upside in the markets and protecting the downside! Here are 4 Reasons to stay invested in SIPs even during the pandemic.

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