Why Rebalancing Works
Without rebalancing, a bull market in equities gradually increases your equity weight from, say, 60% to 80%. You end up with more risk than intended — and when the correction hits, larger losses than your risk profile can handle.
Rebalancing forces you to book profits in outperforming assets and reinvest in underperformers at lower prices. Over time, this mechanically enforces "buy low, sell high" without any market timing required.
Rebalancing Triggers
Use either time-based or threshold-based triggers (or a combination):
- Annual rebalancing: Simple, tax-efficient (aligns with long-term capital gains thresholds)
- 5% threshold: Rebalance when any asset class deviates more than 5% from target
- Hybrid: Check quarterly, rebalance only if drift exceeds 5%
Tax-Efficient Rebalancing Methods
Method 1: New Investment Routing
Instead of selling outperforming assets (triggering capital gains), route new SIP contributions entirely to underperforming assets until balance is restored. Zero tax, maximum efficiency.
Method 2: Switch After 1 Year
If switching is necessary, wait for the 1-year mark for equity funds to qualify for LTCG treatment (10% above ₹1 lakh) instead of STCG (15%). This alone can save 5% in taxes.
Rebalancing Frequency Research
Studies show that annual rebalancing provides nearly the same risk-adjusted returns as monthly rebalancing — with significantly lower transaction costs and taxes. More frequent rebalancing is rarely worth the friction for retail investors.