VR Logo

How to rebalance a portfolio in the case of SIP investments?

Dhirendra Kumar suggests a simple way of rebalancing your portfolio without attracting short-term capital gains tax

How to rebalance a portfolio in the case of SIP investments? Also, will not rebalancing yearly increase tax implications as some units can also attract short-term capital gains tax?
- Tanmay Mohan

Explaining it through an example - if you decide to invest half of your money in equity and half of it in debt, the simplest way of rebalancing in a tax-efficient manner with your ongoing SIP investment every year is to change your incremental investments in such a manner that your portfolio gets rebalanced. Thus, if you start your investment of Rs 10,000 in a debt fund and an equal amount in an equity fund, you would want it to remain 50 per cent each in debt and equity at the end of each year.

Suppose, at the end of one year, you realise that your equity investment has become 40 per cent because it has come down in value and debt has actually gone up by about 8-9 per cent. So, invest your future money, the future Rs 10,000 a month, in such a manner that your asset allocation gets rebalanced. Thus, your incremental investment will be happening in a manner that you will be investing in an asset, either debt or equity, which has done poorly and you will be investing less in something which has done much better. That is how you will achieve the asset allocation.

Post Your Query