Key takeaways
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Rebalancing = selling overweight assets and buying underweight to restore target allocation✓
Without rebalancing, a bull market silently increases your risk beyond your intention✓
Annual rebalancing or 5% threshold-based rebalancing both work well✓
In India, equity rebalancing triggers capital gains tax — use tax-efficient strategies✓
Balanced advantage funds auto-rebalance for you — worth considering📌
How a portfolio drifts without rebalancing
You start with: 70% equity, 30% debt.
Two years of bull market. Equity grows 60%, debt grows 12%.
Your portfolio is now: 82% equity, 18% debt.
You intended 70/30 risk. You accidentally have 82/18 risk — significantly higher than planned.
If markets now fall 30%: your portfolio falls 0.82 × 30% = 24.6%.
If you had rebalanced to 70/30: fall would be 0.70 × 30% = 21%.
The extra 3.6% loss on a ₹20 lakh portfolio = ₹72,000.
Two rebalancing approaches — both work
Annual rebalancing (simpler)
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Review every April — one fixed date✓
If allocation drifted from 70/30 to 78/22 → sell 8% equity, buy debt✓
Fewer transactions = lower tax events✓
Works for most investors with 1–2 year review cycles✓
Requires 1 hour per year5% threshold rebalancing (responsive)
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Monitor monthly or quarterly✓
Rebalance whenever any asset drifts 5%+ from target✓
More responsive to large market moves✓
More tax events if markets are volatile✓
Better for active investors watching their portfolio regularly✅
Tax-efficient rebalancing in India
Selling equity for rebalancing triggers capital gains. Use these strategies to minimise tax:
1. Redirect new investments: Instead of selling equity, invest new money into the underweight asset (debt). No tax event.
2. Sell losses to offset gains: If any fund is in a loss, sell it (realising the loss), then sell the overweight equity gain. The loss offsets the gain.
3. Sell within ₹1.25L LTCG exemption: If your annual LTCG is below ₹1.25L, rebalancing is tax-free for equity funds held over 12 months.
4. Use balanced advantage funds: These dynamically rebalance between equity and debt internally — no capital gains triggered for you.
⚠Educational content only. Numbers shown are illustrative — actual returns vary. This is not investment advice. Consult a SEBI-registered financial advisor before investing.
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