Key Takeaways
- Controls Risk: Portfolio Rebalancing keeps it aligned with your chosen asset mix (like 60:40) so your risk level doesn’t change as markets move.
- Sell High, Buy Low: It forces disciplined profit-booking from overgrown assets and adds to undervalued ones without emotional decision-making.
- Don’t Overdo It: Review every 6 months or when allocation drifts by ±5% instead of reacting to every market movement.
- Use Cash Flow Smartly: Rebalance through new inflows (SIP/bonus) or STPs to avoid taxes that may occur when you sell.
- Improves Stability: It might not always boost returns, but it improves long-term consistency, reduces volatility, and keeps your portfolio goal-focused.
Let’s start with a quick story!
Imagine two colleagues, Priya and Rahul, who both began investing on 31 December 2005 with the same plan: 60 per cent equity and 40 per cent debt.
Priya checks her allocation each year and rebalances when it drifts; Rahul sets it up once and leaves it.
By the end of 2020, the gap between them is striking. Priya’s disciplined rebalancing turns ₹100 into roughly ₹462, while Rahul’s buy-and-hold approach reaches about ₹385. A difference that works out to roughly 1.3 percentage points a year across 15 years.
That is not a mysterious edge; it is the arithmetic of disciplined selling and buying at systematic intervals.
That example matters for India now more than ever. The country’s SIP ecosystem has grown dramatically. Recent industry reporting shows millions of new SIPs and monthly SIP contributions repeatedly breaching the ₹20,000-crore mark in 2024.
At the same time, many retail investors set up SIPs and rarely revisit allocations once the initial plan is in place.
Portfolio rebalancing is the routine that keeps an allocation faithful to the risk you signed up for; without it, your portfolio can slowly become something you no longer recognise.
What is Portfolio Rebalancing?
At its core, rebalancing is simple. You decide on an asset mix that reflects your goals and risk tolerance. For example, 60 per cent equity, 40 per cent debt, and you periodically restore those proportions when market moves push them away.
If equities run hard and become 70 per cent of your portfolio, rebalancing requires trimming equities and adding debt until you’re back to the target.
It is not a market-timing scheme; it is an act of risk control.
Why Portfolio Rebalancing Matters?
Portfolio rebalancing does three practical things. First, it enforces a disciplined “sell high, buy low” behaviour that investors rarely follow instinctively.
Second, it keeps the portfolio’s risk exposure aligned with your stated profile. What started as a moderate-risk allocation doesn’t morph into a high-risk portfolio simply because a bull market persisted.
Third, rebalancing tends to reduce portfolio volatility over time. Large empirical studies and institutional analysis have shown that rebalanced portfolios experience lower effective equity exposure and therefore lower realised volatility than comparable never-rebalanced portfolios, even if nominal returns can sometimes be higher in long trending bull markets.
In short, rebalancing is a tool to manage risk exposure, not a guaranteed method to maximize raw returns.
When Should You Rebalance Your Portfolio?
There are three practical approaches that most investors adopt, and each fits different temperaments.
A calendar approach (quarterly, semi-annually, or annually) is simple and predictable. A threshold approach rebalances only when any asset class drifts beyond a chosen band, for example, ±5 percentage points, and avoids trivial trades.
Most prudent investors use a hybrid periodic review (say, every six months) but trade only when drift exceeds a tolerance threshold.
For Indian investors, aligning rebalancing with known cash inflows, bonuses, salary hikes, or SIP increases reduces the need to sell and therefore reduces tax frictions.
How to Rebalance Your Portfolio?
Begin with a clear target allocation and a reliable ledger of holdings. Use your broker or mutual fund statements to calculate current weights.
If a drift has occurred beyond your agreed tolerance, plan execution with tax and cost in mind.
Rather than a string of checkboxes, here is a short narrative of execution choices. If you frequently receive new money (SIP increments, a year-end bonus), use those inflows to add to underweighted buckets. This is the lowest-cost, most tax-efficient route.
If you hold mutual funds and want to move cash from debt to equity gradually, set up an STP (Systematic Transfer Plan). If you prefer hands-off, many advisory platforms and robo-advisors can monitor drift and rebalance automatically according to your rules. If you choose manual trades, remember to document trade dates and expected tax outcomes before you execute.
Tax deserves special attention in India because the rules have changed in recent years. Long-term capital gains on equity instruments are subject to revised rates and exemption thresholds (the exemption slab and applicable rates were updated in recent budgets), and taxation of debt funds also underwent structural changes.
In practice, that means selling an equity or debt holding to rebalance may create a taxable event where possible, prefer inflows or STPs, and consult your tax adviser for large portfolio changes.
Benefits of Portfolio Rebalancing
Over long horizons, disciplined rebalancing improves the portfolio’s risk-adjusted characteristics.
It dampens concentration risks and can materially reduce drawdowns in stress years by ensuring the portfolio is not accidentally overweight in the most volatile asset class.
The trade-offs are real: transaction costs, potential taxes, and the occasional missed upside when an asset you trimmed continues an extended rally. Experienced investors weigh those costs and adopt the cadence that fits their goals and tax situation.
Common Mistakes of Portfolio Rebalancing
Investors commonly make two opposite errors. Portfolio rebalancing too frequently is reacting to every market wobble and paying heavy costs, and portfolio rebalancing too rarely is allowing drift to create a risk profile you did not approve.
Another frequent mistake is mechanically rebalancing into underperforming funds without assessing quality. Portfolio rebalancing restores your allocation, but the holdings themselves still deserve periodic review.
Conclusion
Portfolio rebalancing is modest in action but consequential in effect. It is an operational discipline that preserves your chosen balance between growth and stability.
For most long-term Indian investors, a practical plan is to review allocations semi-annually, use a ±5% drift band as the trigger for action, prioritise inflows or STPs to correct imbalances, and keep tax impact front of mind.
That quiet routine will not produce headlines, but it will make your long-term portfolio behaviour far more predictable and far easier to live with.
Frequently Asked Questions (FAQs)
1. How often should you rebalance the portfolio?
Most investors rebalance once every 6-12 months. You can also rebalance when asset allocation moves 5-10% from your target. Don’t do it too often, or you’ll increase costs and taxes.
2. Is portfolio rebalancing taxable in India?
Yes, selling stocks or mutual funds while rebalancing can trigger capital gains tax. Equity held over 1 year is taxed at 12.5% (LTCG), and under 1 year at 20% (STCG).
3. Can mutual funds or ETFs rebalance automatically?
Some funds, like balanced advantage or target-date funds, rebalance internally. But most mutual funds and Indian ETFs don’t auto-rebalance your personal portfolio. You’ll need to adjust it manually.
