How to Rebalance Your Mutual Fund Portfolio ?

 

Rebalancing keeps your investments aligned with your goals and risk level. It means restoring your portfolio to the target asset mix (for example, 70% equity and 30% debt) after market moves change those weights.

Why rebalance?

• Maintain risk profile: If equity performs strongly, your equity share may grow and increase risk beyond your comfort zone.
• Lock in gains: Rebalancing sells some winners and buys underperformers, which can improve long-term outcomes.
• Discipline: Forces disciplined buying and selling instead of emotional decisions.
• Align with goals: Keeps your portfolio matched to goals (retirement, house, education) and timeline.

When should you rebalance?

1. Calendar-based

Rebalance at fixed intervals — for example, every 6 months or once a year. Simple and easy to follow.

2. Threshold-based (tolerance band)

Rebalance only when an asset class moves beyond a set band, e.g., +/- 5% or 10% from target. More efficient and focused on material drift.

Common rebalancing methods

1. Sell and buy: Sell part of the overweight asset and buy the underweight one to return to target weights.
2. New money: Use new contributions to buy the underweight assets (avoids selling winners).
3. Partial rebalance: Adjust only the largest deviations or rebalance a portion (e.g., 50% of the drift).
4. Automatic rebalancing: Some platforms/AMCs let you set auto-rebalance rules (useful if available).

Step-by-step rebalancing process (simple)

1. Confirm target allocation: Example: Equity 70%, Debt 30% (based on your risk & goal).
2. Check current allocation: Calculate current weights — most platforms show this automatically.
3. Decide method: Sell winners, use new money, or partial rebalance.
4. Calculate amounts: Work out how much to sell/buy to reach the target.
5. Consider costs & taxes: Account for exit loads, transaction fees, and capital gains tax before executing.
6. Execute & record: Make transactions and keep documentation for taxes and future reviews.

Practical example

Target: Equity 60%, Debt 40%.
Current after market moves: Equity 68%, Debt 32%.
Action: Move 8% of the portfolio from equity into debt to restore 60/40. If portfolio value is ₹10 lakh, sell equity worth ₹80,000 and buy debt with ₹80,000 (or use new cash).

Costs, taxes and other considerations

• Exit load: Some funds charge an exit load if redeemed early — check the scheme’s terms.
• Capital gains tax: Selling units may trigger STCG or LTCG — estimate after-tax benefit of rebalancing.
• Transaction fees: Platform or broker fees can add up if you rebalance frequently.
• Spread & liquidity: For small-cap or thinly traded funds, large sells may be less efficient.

How often is too often?

Rebalancing too frequently can increase costs and taxes. A practical approach is either calendar-based (6–12 months) or threshold-based (5–10% band) — whichever fits your temperament and account size.

Smart tips to rebalance efficiently

• Use new contributions to buy underweight assets first.
• Consider partial rebalances instead of full ones to limit tax impact.
• Prefer rebalancing in tax-efficient accounts (if available) to reduce immediate tax burden.
• Use a low-cost index fund as a core holding to reduce turnover and fees.
• Document reasons and results — helps avoid emotional mistakes later.

Tools & automation

Many robo-advisors and platforms offer auto-rebalancing. Advantages:

• Removes emotion and enforces discipline.
• Saves time and simplifies execution.
• Be sure to check settings for frequency and tolerance bands.

When not to rebalance

• If the deviation is small (within your tolerance band).
• When taxes and costs outweigh expected benefits.
• During extreme market events where panic selling would hurt long-term returns — stick to plan.

Quick checklist before you rebalance

1. Confirm current allocation and target allocation.
2. Estimate exit load & tax on sale.
3. Decide method: sell winners or use new contributions.
4. Execute trades and document transactions.
5. Set the next review date (6–12 months or when a threshold is hit).

FAQs

How often should I rebalance?

Typically every 6–12 months or when an asset class deviates more than 5–10% from its target. Choose a rule you can follow consistently.

Does rebalancing improve returns?

Rebalancing does not guarantee higher returns but helps maintain desired risk, capture gains and avoid letting winners create excessive exposure.

What if taxes make rebalancing expensive?

Use new money to rebalance, consider partial rebalances, or rebalance within tax-advantaged accounts when possible.

Final thought: Rebalancing is a simple habit that keeps your portfolio aligned with your goals. Use a clear rule, mind the costs and taxes, and make it part of your annual financial routine.

Disclaimer: Educational content only. This is not personalised financial advice — consult a certified advisor for specific guidance.