Rebalancing is the periodic reset of your portfolio to its chosen asset allocation. If you planned 60% equity and 40% debt, and a strong year for equity has moved you to 70:30, rebalancing means shifting some money from equity to debt — or directing new money to debt — until you are back near 60:40.
Why it matters
Without rebalancing, a portfolio drifts towards whatever has done well recently, which usually means more risk than you signed up for. Rebalancing keeps risk where you intended. It also imposes a quiet discipline: trimming what has risen and adding to what has lagged, the opposite of what emotions tend to suggest.
How to read it
- Calendar-based: review once or twice a year and rebalance if needed.
- Threshold-based: rebalance when an asset class drifts beyond a set band — say five percentage points from target.
- Use cash flows first. Directing new SIPs or lumpsums to the underweight asset class can rebalance without selling anything.
Common misconceptions
- “Rebalancing boosts returns.” Its main job is controlling risk. Sometimes it helps returns; sometimes it trims a winner too early.
- “Rebalance constantly.” Frequent selling adds tax and exit-load costs and rarely adds value.
In India: Selling to rebalance can trigger capital gains tax and exit loads. Some investors use hybrid funds that rebalance internally; check how such schemes are taxed under current rules.
Worked example
For illustration, assume a ₹10,00,000 portfolio targeted at 60% equity and 40% debt. A year later equity is worth ₹7,20,000 and debt ₹4,20,000 — about 63:37 of ₹11,40,000. Restoring 60:40 means equity of ₹6,84,000 and debt of ₹4,56,000, so about ₹36,000 moves from equity to debt.
Figures are for illustration only — not a forecast or a recommendation.
Related terms
Asset allocation
How you divide money across asset classes such as equity, debt, gold and cash — the biggest single driver of a portfolio’s risk and behaviour.
Diversification
Spreading money across different investments so that a loss in any one of them has a limited effect on the whole portfolio.
Equity
Ownership in a company through its shares; equity investors share in the company’s growth and profits, and bear the risk of losses.
Debt
Lending money in return for interest — through bonds, deposits or debt mutual funds — with returns driven mainly by interest rates and credit quality.
Hybrid fund
A mutual fund that invests across asset classes — usually equity and debt, sometimes gold — in proportions set by its category and mandate.
Capital gains
The profit made when you sell or redeem an investment for more than it cost; taxed as short- or long-term depending on how long you held it.