Portfolio Rebalancing: Write the Rule Before the Market Moves
A rebalancing rule written while you are calm is the only one you will follow. Calendar vs threshold, four tax-efficient methods, and where EPF and PPF fit.
At the mill I run, the stock swells after paddy procurement and shrinks as rice is milled and sold, so the mix of what the business holds changes through the year whether anyone decides anything or not. A portfolio drifts the same way. You set a target, say 60% equity and 40% debt, and after a strong equity run you find yourself at 75% equity, carrying more risk than you intended.
Rebalancing is the periodic act of selling what has grown and buying what has lagged, to restore your intended allocation. This guide covers the mechanics: when to rebalance, the four tax-efficient methods in the order to use them, how to count EPF and PPF, how to execute and record it, and a worked example. It is education, not advice. I am not a SEBI-registered adviser, and nothing here tells you what your target allocation should be. What I can tell you is how I think about the rule itself: it has to exist before the market gives you a reason to abandon it.
Why Rebalancing Matters
Rebalancing is not about timing the market or chasing returns. It serves three distinct purposes:
1. Risk control: Your intended risk level changes when equity grows disproportionately. If you modelled your retirement plan at 60% equity but you're actually running at 78%, your portfolio is more volatile than you planned for. A single bad year hits harder than you anticipated.
2. Behavioural discipline: A rule-based rebalancing process removes emotion from the decision. Without a system, most investors either never sell winners ("it's still going up") or panic and sell everything in a downturn. A rebalancing rule says: when equity hits X%, bring it back to Y%. No emotion required.
3. Structural return improvement: Rebalancing systematically sells high and buys low, not perfectly but consistently over time. Because it trims what has run up and adds to what has lagged, disciplined rebalancing tends to improve risk-adjusted returns over long horizons by capturing some mean reversion across asset classes. The effect is modest, varies by period, and is not guaranteed; the bigger reason to rebalance remains risk control, not return-chasing.
If you have not yet set a target allocation, asset allocation covers how people usually think about the split.
When to Rebalance: Two Approaches
Calendar-based rebalancing: Review your portfolio on a fixed date each year. April 1 (start of the new financial year) works well in India because it aligns with your annual financial review and post-tax year visibility. Mark it on the calendar and don't miss it.
Threshold-based rebalancing: Rebalance when any asset class drifts more than 5-10% from its target allocation. If your equity target is 65% and it reaches 75%, that triggers a rebalance regardless of when the last one occurred. This catches major market movements mid-year without requiring constant monitoring.
For most investors, combining both works best: annual review as the baseline, with a threshold trigger if a major bull or bear market pushes the portfolio significantly off-target.
Why I Would Write the Rule Down First
The drawing power on a cash credit account is recalculated every month from the stock statement. The method does not bend because a season feels good or bad, and that is exactly what makes it useful: the number is worked out, not argued over.
A rebalancing rule deserves the same treatment. The date you review, the drift that triggers action, the order of methods, and the target itself should be written down while you are calm, and then applied mechanically when you are not. In a portfolio, I would put that on a sheet: the target, the current percentages and the gap, filled in before any opinion about the market is allowed into the room.
The rule matters most in exactly the years it feels least necessary. After a long equity rally, trimming equity feels like selling your best performer. After a crash, adding to equity feels like catching a falling knife. A threshold decided in advance is the only kind most people will actually follow at those moments.
The Four Tax-Efficient Rebalancing Methods
In India, selling investments triggers capital gains tax, so the order in which you use these methods matters:
Method 1: Redirect new money (Zero tax event) Stop SIPs into overweight asset classes and direct all new investments into underweight ones. If equity is at 75% (target 65%), pause equity SIPs for 3-6 months and direct new savings to debt funds. No selling, no tax. This is always the first tool to use.
Method 2: Use dividend/interest income (Zero tax event) Route interest received from debt instruments or dividends (if any) into the underweight asset class. No selling, no realisation of capital gains.
Method 3: Use the ₹1.25 lakh LTCG annual exemption (Tax-free) For equity mutual funds held over 12 months, the first ₹1.25 lakh of long-term capital gains per financial year is completely tax-free. This annual exemption resets on April 1. Use it to redeem equity gains and reinvest in debt, up to the exemption limit, with zero tax. This is legal, common, and efficient.
Method 4: Sell and reinvest (Tax applies) When the above methods cannot correct the drift, for example after a multi-year bull run where equity has grown far above target, a direct sell-and-reinvest may be necessary. For equity held over 12 months, LTCG applies at 12.5% on gains above ₹1.25 lakh. Plan this for the least tax-impact lot (smallest unrealised gain, or gains that fall near the exempt threshold). The capital gains tax guide covers the holding periods and rates in full.
- Redirect new moneyPause SIPs into overweight classes and send new savings to underweight ones: no selling, no tax.
- Route dividends and interestPut interest from debt instruments, or any dividends, into the underweight class; still no selling.
- Use the ₹1.25 lakh LTCG exemptionRedeem equity gains held over 12 months, up to the exemption, and reinvest in debt with zero tax.
- Sell and reinvestOnly when the other methods cannot correct the drift; LTCG at 12.5% on gains above ₹1.25 lakh.
Source: “The Four Tax-Efficient Rebalancing Methods”, above
What Not to Do
- Don't rebalance every quarter. The incremental risk reduction is minimal and the tax and transaction costs are real.
- Don't rebalance if drift is under 3-5%. Transaction friction exceeds the benefit.
- Don't rebalance based on market predictions. Selling equity because "the market looks expensive" is market timing, not rebalancing.
- Don't treat EPF/PPF as separate from rebalancing. These are debt instruments. Include them in your debt allocation when assessing drift.
A Simple Annual Rebalancing Checklist
- Pull your complete portfolio: demat, mutual funds, EPF, PPF, gold, FDs
- Calculate each asset class as a percentage of total
- Compare to your target allocation
- Identify which classes need buying and which need selling
- Execute using the four methods above, in order
- Document the rebalance with date and reason
The yearly finance review template has an allocation section that shows target against actual, which is most of steps 2 to 4.
Getting Your Full Portfolio Data for Rebalancing
The biggest practical obstacle to rebalancing is not the decision; it is gathering data from scattered sources. Here is how to pull everything together in one session:
Mutual funds, CAS from CAMS and KFintech: Request a Consolidated Account Statement from camsonline.com and kfintech.com. Each covers different AMCs. The CAS shows all fund holdings, current NAV, total units, and current value. MFCentral (mfcentral.com) provides a combined CAS covering both registrars. The CAS is the most reliable source for mutual fund holdings because it reflects the registrar's records directly, more accurate than any third-party app for unit counts.
Demat holdings, CDSL or NSDL: Log into mycas.in (for CDSL accounts) or eservices.nsdl.com (for NSDL accounts) and download your demat holding statement. This shows all shares and ETFs at current market price. Alternatively, log into your broker (Zerodha, Groww, ICICI Direct, HDFC Securities); the holdings page shows current values.
EPF balance, EPFO member portal: Log into member.epfindia.gov.in with your UAN. Your EPF passbook shows the current balance. EPF is a debt instrument, so include it in your debt allocation. If you also contribute to VPF (Voluntary Provident Fund), it will show here too.
PPF balance: Log into your bank's net banking or visit the branch. SBI, HDFC, ICICI, Axis, and Post Office all offer online PPF balance access. PPF is a debt instrument; include it in debt allocation.
NPS balance: Log into the NPS Trust portal (npscra.nsdl.co.in) or your Point of Presence (POP). Your PRAN-linked statement shows the split between equity (E), corporate bonds (C), and government securities (G) within your NPS. Map the equity portion of NPS to equity allocation and the bond and G-Sec portions to debt.
Once you have data from all these sources, enter the values in a spreadsheet to calculate percentages. A typical format:
| Asset Class | Amount (₹) | % of Total | Target % | Action Needed |
|---|---|---|---|---|
| Equity MF | 12,00,000 | 52% | 60% | Buy more |
| Direct equity | 8,00,000 | 35% | 25% | Reduce |
| Debt MF | 1,50,000 | 6.5% | 10% | Buy more |
| EPF + PPF | 1,00,000 | 4.3% | — | (auto-contributed) |
| Gold ETF | 50,000 | 2.2% | 5% | Buy more |
Including EPF and PPF Correctly in Allocation Calculations
A common rebalancing mistake is omitting EPF and PPF from the calculation entirely, treating them as "separate" from the portfolio. They are not separate; they are significant debt allocations that must be included.
EPF earns approximately 8–8.5% (interest rate declared annually by the EPFO, typically in March). PPF earns the government-declared rate, reset quarterly, typically in the 7–7.5% range. Both are debt instruments from an asset allocation perspective.
For a person with ₹12 lakh in equity mutual funds and ₹8 lakh in EPF+PPF, the current equity:debt ratio is approximately 60:40, not 100% equity as it might appear if EPF is ignored.
When EPF contributions are running at ₹4,000+ per month (employer + employee combined), they are automatically buying debt each month without any action on your part. This constant new debt inflow means your portfolio naturally drifts toward debt unless equity is growing faster, the opposite of the common assumption that a bull market always pushes you equity-heavy.
Executing a Rebalance on Zerodha and Groww
Once you've decided what to buy and sell, here is the practical execution on two common platforms (menus change, so check the current screens):
To pause a SIP temporarily on Zerodha Coin: Log in → Mutual Funds → SIP Orders → Select the SIP → Pause. You can pause for 1–3 months. This is the cleanest way to stop new equity contributions while the portfolio is equity-heavy, without cancelling the SIP entirely.
To set up a new SIP on Groww: Log in → Mutual Funds → Select fund → Start SIP → Choose date (5th or 10th preferred). For debt rebalancing, select a short-duration debt fund or a liquid fund. Enter the monthly amount and confirm the bank mandate.
To redeem partial mutual fund units on Zerodha Coin: Log in → Portfolio → Select fund → Redeem → Enter units or amount. The redemption typically takes 1–2 business days to credit to your bank account. For equity LTCG harvesting, enter the amount that keeps you within the ₹1.25 lakh annual exemption.
To check LTCG gain amount before redemption on Groww: Log in → Portfolio → Select fund → Capital Gains tab. Groww shows the split between short-term and long-term gains for each fund. Use this to calculate how much you can redeem within the ₹1.25 lakh exemption before executing.
Documenting the Rebalance
Each rebalance should be documented in your investment tracker spreadsheet. Create a "Rebalance Log" tab with columns:
| Column | Content |
|---|---|
| Date | When the rebalance was done |
| Trigger | Annual review / Threshold breach |
| Pre-rebalance allocation | E.g., "72% equity, 28% debt" |
| Post-rebalance allocation | E.g., "65% equity, 35% debt" |
| Actions taken | "Paused equity SIP for 2 months; added ₹30,000 to liquid fund" |
| Tax impact | LTCG gains realised, tax applicable |
| Notes | Any decisions deferred, rationale for allocation changes |
This log builds a record over years. When you look back after five years, you can see exactly what you did and when, which is both useful for your own learning and practically important if you're ever asked to explain a transaction to a tax officer.
A Worked Example: Rebalancing a ₹30 Lakh Portfolio
Consider a portfolio with a target allocation of 80% equity (65% in equity funds, 15% in direct stocks) and 20% debt. After a strong equity year, the portfolio looks like this:
| Asset | Current Value | Current % | Target % |
|---|---|---|---|
| Equity MF | ₹18,00,000 | 60% | 65% |
| Direct equity | ₹7,50,000 | 25% | 15% |
| Debt MF | ₹2,40,000 | 8% | 12% |
| EPF + PPF | ₹2,10,000 | 7% | 8% |
| Total | ₹30,00,000 | 100% | 100% |
Direct equity at 25% versus a 15% target is the most significant drift, driven by strong price appreciation in individual stocks. Here is how to rebalance in order:
Step 1: Redirect new money. Pause the equity mutual fund SIP for 3 months and redirect that ₹15,000/month to a short-duration debt fund. Over 3 months, ₹45,000 moves from equity to debt allocation, with no tax event.
Step 2: LTCG harvesting. Check the long-term unrealised gains in direct equity positions. If ₹80,000 in gains qualify as LTCG (held more than 12 months), sell those shares and reinvest in a Nifty 50 index fund. You've moved ₹80,000 from concentrated direct equity to diversified equity, rebalancing within the equity category, while also booking LTCG within the ₹1.25 lakh annual exemption.
Step 3: Direct sell if needed. If the above steps aren't enough to bring direct equity below 18% (a more realistic short-term threshold), sell an additional portion of direct equity with the smallest unrealised gains. Pay LTCG at 12.5% only on gains above the ₹1.25 lakh exemption.
The end result: direct equity concentration is reduced, debt allocation is building, and the total tax outflow is zero or minimal because you used the LTCG exemption and redirected new money first.
- Equity MF₹18,00,000 · target 65%60%
- Direct equity₹7,50,000 · target 15%25%
- Debt MF₹2,40,000 · target 12%8%
- EPF + PPF₹2,10,000 · target 8%7%
Source: “A Worked Example: Rebalancing a ₹30 Lakh Portfolio”, above · a worked example, for illustration
Common Rebalancing Mistakes in India
Rebalancing based on fund performance, not allocation. Selling a fund because it underperformed this year is not rebalancing; it's chasing returns. Rebalancing is triggered by allocation drift, not by fund rankings. If a large-cap fund is lagging but large-cap is underweight in your portfolio, you should be buying, not selling.
Ignoring transaction charges on direct equity. Each stock sale on NSE/BSE incurs brokerage, Securities Transaction Tax (STT of 0.1% on delivery sales), SEBI charges, and other fees. For a ₹2 lakh sale, these can add up to ₹200–400. On mutual funds, there are no STT charges on redemption. When choosing what to sell for rebalancing, factor in the transaction cost; it's small but real.
Treating the NPS equity allocation as separate. NPS allows you to allocate up to 75% of contributions to equity (for investors below 50). The equity portion of your NPS should be counted in your overall equity allocation. An investor with 60% equity in mutual funds and 70% equity in NPS has a blended equity exposure significantly above 60%. Factor in NPS when calculating your true allocation.
Rebalancing without checking for exit loads. Equity mutual funds typically have a 1% exit load on redemptions within 12 months of purchase. If you redeem a fund that was purchased less than 12 months ago, you pay both the exit load and potentially STCG (Short-Term Capital Gains at 20%). Always check whether units being considered for rebalancing are beyond the exit load period before redeeming. How mutual fund gains are taxed is covered in tax on mutual funds.
This guide explains the mechanics of rebalancing, not what your target allocation should be; that depends on your goals, risk appetite, and time horizon, which is a conversation for a SEBI-registered investment adviser, not a general guide. The part you can own yourself is the rule: write it down, and let the numbers, not the headlines, tell you when to act.
Frequently Asked Questions
Section numbers under the Income-tax Act, 2025
Sections of the Income-tax Act, 1961 cited in this article govern income earned up to 31 March 2026 (returns for AY 2026-27). From tax year 2026-27 the matching provisions are in the Income-tax Act, 2025. TDS and TCS switch by the date of payment or credit.
| Income-tax Act, 1961 | Income-tax Act, 2025 |
|---|---|
| Section 112A | Section 198 |
Mapped with the Income Tax Department’s comparison of the 1961 and 2025 Acts, checked 15 September 2026.
Sources and references
- Income Tax Department — Section 112A (₹1.25 Lakh LTCG Exemption)
- AMFI — Consolidated Account Statement (CAS)
- SEBI — Securities Transaction Fee Structure
Rules, rates, and thresholds in India change over time. Always confirm the current position with the official source above before acting on it.