Stock Market · Mutual funds, deeper

Portfolio rebalancing

Rebalancing is the act of restoring your target asset allocation after market movements have shifted it. It's the most counterintuitive but most profitable habit in long-term investing.

Why rebalancing matters

You start with 70:30 equity:debt allocation (₹7 lakh equity, ₹3 lakh debt).

Equity rises 40%, debt rises 8%.

Now you have ₹9.8 lakh equity, ₹3.24 lakh debt = 75:25 allocation.

Your risk has silently increased. A 30% equity crash would now hurt more than originally planned.

Rebalancing: sell some equity, buy some debt, restore 70:30.

The counterintuitive part

Rebalancing forces you to SELL what's done well and BUY what's underperformed. Every instinct says do the opposite.

> But over decades, this disciplined behaviour outperforms buy-and-hold by 0.5-1% annually. A massive cumulative advantage.

When to rebalance

Two main approaches:

1. Calendar-based: every 6 or 12 months. Simple, predictable.

2. Threshold-based: when any asset drifts more than 5% from target. More responsive.

Most investors use a hybrid: review every 6 months, rebalance only if drift > 5%.

Methods of rebalancing

1. Sell winners + buy losers (most direct, triggers tax)

2. Direct new investments toward underweight assets (no tax, slower)

3. SWP from overweight assets to underweight assets

Tax efficiency

Rebalancing triggers capital gains. To minimise:

• Use new SIP contributions to gradually rebalance (no sale needed)
• Rebalance in years with low income to use lower tax brackets
• Time large rebalances to use LTCG exemption (₹1.25 lakh)

Behavioural benefit

Rebalancing reduces FOMO. When you've sold high during a rally, you're not tempted to buy more at the top. When you've bought low during a crash, you've already participated in the upside.

Tools

Most platforms show your current allocation against your target, and several will alert you when the two have drifted apart.

Takeaway. Rebalancing forces you to sell winners and buy losers. Counterintuitive but proven to add 0.5-1% annually over decades. Review every 6 months, act when allocation drifts 5%+ from target. Use new contributions for tax-efficient rebalancing.