Rebalancing and a portfolio health score

You chose a mix in chapter three. Markets will not respect it. After a good year for shares, your 70 percent equity quietly becomes 78 percent. After a bad one, it shrinks to 62. Rebalancing is the habit of nudging the mix back to where you decided it should be. It is boring, it is slightly uncomfortable, and it is one of the few free lunches in investing. A simple health score helps you see when it is due.

What rebalancing is

Rebalancing means selling a little of what has grown too large and buying a little of what has shrunk, so your buckets return to their target shares. It feels backwards. You are trimming the winner and adding to the laggard. But that is exactly the point: it forces you to sell high and buy low without having to predict anything.

A small move, and that is normal. Rebalancing is rarely dramatic. Over many years, those small moves keep your risk where you chose it rather than where the market pushed it.

Three ways to do it

1. Calendar rebalancing. Once a year, on a date you will remember, check the mix and correct it. Simple and enough for most people.
2. Threshold rebalancing. Act only when a bucket drifts more than, say, 5 percentage points from target. Fewer transactions, slightly more watching.
3. Rebalancing with new money. Instead of selling anything, direct your next few SIP instalments to the bucket that has fallen behind. No tax, no exit load, and it works well while your portfolio is small compared with your monthly SIP.

The third method is the kindest to a beginner. If equity is overweight, pause the equity SIP for two months and route the money to debt. The mix drifts back without a single sale.

Costs that come with selling

When you do sell, two things can bite. Exit load, typically charged if you redeem within a year of buying, goes back into the scheme, not to anyone's pocket, but it still reduces your money. And capital gains tax: equity units sold within twelve months attract short-term capital gains tax at 20 percent, while longer holdings are taxed at 12.5 percent only on gains above ₹1.25 lakh a year. Rebalancing once a year, after units have crossed twelve months, keeps both costs low. Hybrid funds that rebalance internally avoid the tax at your level altogether, which is one reason they suit people who do not want to manage this themselves.

A portfolio health score

Rather than staring at returns, give your portfolio a quick score out of 10 once a year. Two points for each of five questions.

• Allocation drift. Is every bucket within 5 points of target? Two points if yes, one if slightly off, zero if badly off.
• Goal link. Does every fund belong to a named goal with a date? Orphan investments score zero.
• SIP discipline. Did every SIP run every month this year, including the months markets fell? Missed months cost points.
• Clutter. Fewer than six schemes, with no two doing the same job? Overlap between similar funds is clutter, not diversification.
• Housekeeping. Nominee registered, email and mobile current, emergency fund in place? These are the things that hurt most when ignored.

A score of 8 or more means leave it alone. A score of 5 to 7 means an afternoon of tidying. Below 5, go back to chapter one and rebuild the goals. The score is not about returns at all, and that is deliberate. Returns are mostly out of your hands. Every item on this list is entirely in them.