Portfolio Rebalancing

Investments

Portfolio rebalancing restores your portfolio to its target asset allocation after market movements have shifted the actual allocation. If equity was meant to be 70% but bull market has pushed it to 85%, rebalancing sells equity and buys debt to return to 70:30.

In detail

Why rebalancing works:n1. Enforces sell high / buy low automaticallyn2. Maintains your intended risk level as markets moven3. Prevents overexposure to a single asset classn4. Psychological: removes emotion from the "when to take profits" decisionnnRebalancing methods:nCalendar: rebalance every year on a fixed date (April 1)nThreshold: rebalance when any asset deviates 5-10% from targetnCombined: calendar + threshold (whichever triggers first)nnTax efficiency: use new SIP contributions to rebalance (invest in underweight asset) rather than selling (avoids capital gains tax).

Real-life example

🇮🇳 India example

Target: 70% equity, 30% debt. After 2 bull market years: 84% equity, 16% debt. Rebalance: sell Rs 2.1L equity and buy debt to restore 70:30 ratio. In the next market correction, the debt acts as a buffer. When equity falls, the debt (still full) is redeployed back into equity at lower prices.

Frequently asked questions

How often should I rebalance? ▼

Annual rebalancing is the practical minimum. More frequent rebalancing increases transaction costs and tax events. Threshold-based (rebalance only when allocation deviates 10%+) minimises unnecessary transactions while still managing risk. The research suggests annual or semi-annual rebalancing is sufficient for most retail investors.