In my conversations with investors, one common concern I hear is:
“If I touch my portfolio, won’t I break compounding?”
Now this fear arises because compounding is often misunderstood as something tied to a specific fund. In reality, compounding simply means that every year’s gains are reinvested — whether in the same fund or a better alternative. The power of compounding lies in continuity of reinvestment, not in staying locked into an underperformer.
And depending on what kind of investor you are, a thoughtful rebalance can actually improve outcomes. Here’s a simple example.
Investor A puts ₹10,00,000 into Fund A earning 7% annually.
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After 5 years, she decides to sell, the value has become ₹14,02,251.
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LTCG = ₹4,02,55
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Gains exempt from Tax: 1,25,000
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Final Tax (@12.5%)= ₹34,693
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Final Profit = ₹3,67,857
Investor B, her brother, also starts with ₹10,00,000 in Fund A.
But after 2 years, noticing Fund A is lagging, he switches to Fund B earning 10% annually. Sells Fund B at the end of 5 years
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Fund X
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Value after 2 years at 7% = ₹11,44,909
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LTCG = ₹1,44,900
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Gains exempt from Tax: ₹1,25,000
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Final Tax (@12.5%): ₹2487
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Re invested into Fund Y
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New Investment: ₹11,44,909 - ₹2487 = ₹11,42,414
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Value after 3 years (@10%) = ₹15,20,551
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LTCG = ₹3,78,138
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Gains exempt from Tax: ₹1,25,000
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Final Tax (@12.5%): ₹31600
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Final Profit: =15,20,551 - ₹10,00,00 - ₹31600 - ₹2487 → ₹4,86,464
Investor B ends up with a net higher profit 4.8 lakhs instead of 3.6 lakhs made by Investor A/
In short, rebalancing doesn’t break compounding. If done thoughtfully, it can accelerate it by moving capital to better-performing opportunities.
So what do you think? Drop your thoughts in the comments.