What is Portfolio Rebalancing?

What is Portfolio Rebalancing?

Portfolio rebalancing is the process of periodically adjusting your investments back to your original target asset allocation. Over time, different assets grow at different rates — if equities perform well, your portfolio might drift from an intended 60% equity / 40% debt split to, say, 75% equity / 25% debt, without you actively doing anything. Rebalancing means selling a portion of the outperforming asset and buying more of the underperforming one, to bring the ratio back to your original target.

Why Bother Rebalancing?

It might seem counterintuitive to sell your winners and buy more of what's underperforming, but rebalancing serves an important risk-management purpose: it keeps your portfolio's risk level aligned with what you originally intended. Without rebalancing, a portfolio that started at a moderate 60/40 risk level could unintentionally drift into a much higher-risk 80/20 allocation purely due to market movements, exposing you to more volatility than you signed up for.

How Often Should You Rebalance?

There's no single correct frequency, but two common approaches are: calendar-based rebalancing (e.g., once a year, regardless of how much drift has occurred) and threshold-based rebalancing (rebalancing only when an asset class drifts beyond a set percentage, like 5-10% away from its target). Rebalancing too frequently can increase transaction costs and, in the case of equity investments, may trigger capital gains tax; rebalancing too rarely defeats the purpose of risk control.

Some investors automate portfolio rebalancing using balanced advantage funds, which handle the equity-debt shift internally — SEBI's fund categorization rules for this fund type are available on the SEBI website.

A simple starting rule many investors follow is to check their allocation once a year, on a fixed date like their birthday or the start of a new financial year, rather than trying to time rebalancing around market movements, which is difficult to do consistently well.

Can Rebalancing Be Done Without Selling Anything?

Yes — if you're still actively contributing to your portfolio, you can rebalance simply by directing new investments toward whichever asset class has fallen below its target allocation, rather than selling your existing holdings in the overweight asset. This approach avoids triggering capital gains tax entirely and is often the simplest rebalancing method for investors who are still in their wealth accumulation years rather than near a specific goal.