Rebalancing, and When to Sell
Most selling is done for the wrong reason at the worst time. There are about four good reasons to sell, and rebalancing once a year covers the most common one.
Figures checked · How we calculate
23%of the holding lost by selling in the 2020 crash and buying back once the market recovered
On 12 March 2020 the Nifty closed at 9,590, 22% below its January peak. Someone who sold that day and waited until the old peak was regained bought back on 9 November 2020 at 12,461. Their money now bought 77% of the units they had sold. The market had fully recovered. Their holding had not.
Selling in a crash cost about a fifth of the holding, every time
| Crash | Sold when 20% down | Bought back at the old peak | Units kept |
|---|---|---|---|
| 2008 | 22 January 2008, at 4,899 | 9 November 2010, at 6,302 | 77.7% |
| 2011 | 16 August 2011, at 5,036 | 1 November 2013, at 6,307 | 79.8% |
| 2015–16 | 11 February 2016, at 6,976 | 14 March 2017, at 9,087 | 76.8% |
| 2020 | 12 March 2020, at 9,590 | 9 November 2020, at 12,461 | 77.0% |
The falls of 2018, 2019, 2021–22 and 2024–25 stopped before 20%, so this rule would not have triggered. Nobody knew in advance which falls would stop there.
There are four good reasons to sell
- The money is needed within about three years. Move it out of equity on a schedule, starting about five years ahead, as the asset allocation guide sets out. This is selling because of the date, not the market.
- Your mix has drifted. Sell the part that has grown too large and buy the part that has shrunk. This is rebalancing, covered below.
- The fund has changed or keeps failing. A new fund manager with a different approach, a changed mandate, or an actively managed fund that has trailed its own index for three to five years. For an index fund, the only test is whether it still tracks its index closely and cheaply.
- To use the ₹1.25 lakh tax exemption. Selling long-term units and buying straight back resets your purchase price without changing your holding. The tax guide covers it.
Not on the list: the market fell, the market rose a lot, a news headline, or a different fund did better last year.
Rebalancing keeps the risk you chose; it does not add return
What the unrebalanced portfolio also did was change its own risk. By October 2026 it was 75% equity, and at its highest 82%, not the 60% its owner chose. In the 2020 crash it fell 28.8%; the rebalanced one fell 22.7%. Rebalancing is how you keep the portfolio you decided you could live with.
Rebalance once a year, and only if you are more than 5 points off
- Pick a date and use it every year: a birthday, the start of the financial year, or Dhanteras. Checking more often adds trading and tax without adding much.
- Act only if a part is more than 5 percentage points away from its target, for example equity at 66% against a target of 60%. Smaller gaps are not worth the cost of moving money.
- Use new money first. Point your SIPs at whatever is underweight until the gap closes. No sale, no tax, no exit load.
- If you must sell, sell long-term units and keep the year's equity gains within ₹1.25 lakh where you can.
The rebalancing tool works out what to buy and sell from your current and target percentages.
- Sell this much equity and buy debt₹1.6 LEquity is ₹13.6 lakh; 60% of ₹20 lakh is ₹12 lakh. Done in a day. Tax applies only to the gain in what you sell, and only beyond the ₹1.25 lakh exemption if the units are long-term.
- Or add this much new money, all to debt₹2.7 L₹13.6 lakh is 60% of ₹22.67 lakh. A ₹25,000 monthly SIP pointed at debt closes the gap in about 11 months, with no sale.
Two ways to close the same gap. Selling moves money immediately but may create a tax bill; new money takes longer but costs nothing.
Questions people actually ask
The market has risen a lot. Should I book profits? Only if the rise has pushed your equity share more than 5 points above your target. Then selling the excess is rebalancing. If it has not, "booking profits" just turns a long-term holding into cash you then have to decide what to do with.
How do I know if my fund is underperforming? Compare it with its benchmark index over three and five years, after costs, not with whichever fund topped last year's list. If an active fund trails its index over both periods, an index fund tracking that index is the obvious replacement.
Does switching between funds count as selling? Yes. Every switch is a sale followed by a purchase, with tax on the gain and possibly an exit load. Switch long-term units first.
What if I need the money in the middle of a crash? That is what an emergency fund is for: three to six months of expenses outside the market, so a crash never forces a sale. If you have to sell equity, sell the part that has the most long-term gain, and then rebuild the emergency fund before anything else.
Where do these figures come from? Daily closes of the Nifty 50 from 2008 and Nippon India Gold BeES from 2009, to 16 October 2026. The rebalancing comparison adds about 1.25% a year for Nifty dividends and assumes debt earns a steady 7% a year. The crash table uses the Nifty's price alone; with dividends the result is almost unchanged.