Rebalancing — restoring target allocation

You start with a 60% equity / 40% debt portfolio. Equity has a great year and now sits at 72% / 28%. The risk profile has changed — even though you didn't make any decision. Rebalancing is the act of bringing it back to 60/40.

When to rebalance

Two common triggers, sometimes combined:

• Calendar: review once a year, typically in March (financial year end) or January (calendar reset).
• Threshold: rebalance whenever any asset class drifts 5+ percentage points from target.

Frequent rebalancing (monthly/quarterly) generates more taxable events without meaningfully improving long-run returns. Once-a-year is the practical standard.

How to rebalance, tax-efficiently

Two ways to reduce the tax cost:

• Use fresh contributions: direct new monthly SIPs into the under-allocated bucket until balance is restored. No selling, no tax.
• Switch from gains in long-term units: equity LTCG up to ₹1.25 lakh is exempt per FY — use the annual exemption.

The "use fresh contributions" approach is the cleanest if your monthly investing flow is large enough to bridge the gap within a year. For larger gaps, a one-time switch becomes necessary.

Hybrid and dynamic-asset-allocation funds

SEBI-categorised Dynamic Asset Allocation funds (also called Balanced Advantage funds) handle rebalancing inside the fund — they adjust between equity and debt based on a valuation model. The investor doesn't pay capital gains on the rebalancing trades inside the fund. A useful option for investors who don't want to actively rebalance.

Why it matters

Without rebalancing, a 60/40 portfolio that experiences a multi-year equity rally drifts toward 80/20 — exposing you to bigger drawdowns just before retirement (sequence-of-returns risk). The discipline of bringing it back keeps your actual risk in line with the risk you signed up for.