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Rebalancing is the act of bringing the portfolio back to the mix you chose. If equity was meant to be 60 per cent of financial assets and a strong market has taken it to 75 per cent, you either add new money to the debt-like sleeve or, less often, sell a slice of equity. If equity has fallen to 45 per cent and the goal date has not changed, new surplus goes to equity rather than to the sleeve that held up. The purpose is to stay with the plan. It is not to forecast the next twelve months.
Once a year is sufficient for most households. A second trigger is a threshold: for example, if any bucket has drifted by more than 5 or 10 percentage points from the target. Checking every week recreates the trading habit this academy has asked you to avoid.
Do not rebalance the self-occupied house. Do not rebalance EPF by withdrawing it. Those holdings are part of the map; they are not sliders on an app.
The cleanest method is to direct new SIPs and new surplus toward the underweight bucket until the mix is close enough. That avoids tax and exit loads on a sale. A sale is justified when the drift is large, when no new surplus is arriving, or when a goal date has entered the window that requires a shift from equity into debt-like holdings.
Switching between two similar equity funds is not rebalancing. Moving from equity toward a short-duration fund because education is four years away is.
Selling equity units can create short-term or long-term capital gains, as described in Mutual Fund Mastery. That cost belongs in the decision. It is not a reason never to rebalance. It is a reason to prefer using new cash first.
Households fail at rebalancing for a simple reason. After a strong equity year, shifting money toward debt feels like leaving a winning team. After a weak year, adding to equity feels like catching a falling object. The written target exists so that feeling does not have to invent a new policy each April.
If you never rebalance and never add new money, a long equity bull market will turn an intended 60/40 mix into something much closer to 80/20. The portfolio then has more risk than the plan you signed up for, without anyone placing a new order.
Kavita, who lives in Puducherry, had chosen 65 per cent equity and 35 per cent debt-like holdings on her financial assets (EPF counted). After two strong years equity was 78 per cent. She did not sell. She pointed the next eighteen months of surplus, including a bonus, to PPF and a short-duration fund until the mix was near 67/33. The equity SIP was reduced, not stopped. No tax lot was opened for the sake of a tidy percentage.
The target mix is a policy. Rebalancing is maintenance of that policy. Without the policy, selling and buying is only a reaction.
Rebalancing after every 5 per cent market move, and calling that discipline. It is activity. Discipline is a calendar and a threshold.