Short answer: Portfolio rebalancing is the periodic act of bringing your investments back to their target mix (say 60% equity / 40% debt). It keeps risk in check, enforces buy-low/sell-high discipline, and prevents your portfolio from drifting away from your goals. In India, it also helps you manage taxes and costs smartly.
Why read this
Markets move, your goals evolve, and tax rules change. Without rebalancing, a conservative 60/40 portfolio can quietly turn into an aggressive 75/25—exposing you to drawdowns at the worst time. This guide explains what rebalancing is, how to do it, how often to do it, and what Indian investors must know about taxes, SEBI/AMFI rules, and real-world implementation.
What is rebalancing?
Rebalancing is the process of restoring a portfolio to its target asset allocation after market movements cause weights to drift.
- Example targets: 70/30 (Equity/Debt), 60/20/20 (Equity/Debt/Gold).
- Rebalancing trades sell overweight assets and buy underweight assets to reset risk.
Core formula:
- Current weight of asset i: wi=Valuei∑Valuejw_i = \frac{\text{Value}_i}{\sum \text{Value}_j}
- Drift: Δi=wi−wi\*\Delta_i = w_i – w^{\*}_i (where wi\*w^{\*}_i is your target weight)
- Trade value to rebalance asset i: Tradei=(wi\*−wi)×Portfolio Value\text{Trade}_i = (w^{\*}_i – w_i) \times \text{Portfolio Value}
Why does it matter?
- Risk control: Keeps your volatility and drawdown profile aligned to your plan.
- Buy low / sell high: By definition you trim winners and add to laggards.
- Behavioural edge: Adds rules and removes emotion—especially useful in selloffs. (Global research shows calendar or threshold-based rebalancing improves discipline and can enhance risk-adjusted outcomes. (Vanguard))
- Tax and cost awareness (India): You can choose when and how to realise gains, and use thresholds/cashflows to reduce taxes and fees.
How portfolios drift (simple India-centric example)
Starting point: ₹10,00,000 at 60% Equity / 40% Debt
- Equity ₹6,00,000; Debt ₹4,00,000
| Scenario (1 year) | Equity move | Debt move | New weights | Rebalance? (±5% band) | What you do |
|---|---|---|---|---|---|
| Up market | +40% | +5% | 66.7% / 33.3% | Yes (Equity +6.7%) | Sell ~₹84,000 equity; buy debt |
| Mild up | +25% | +5% | 64.1% / 35.9% | No (Equity +4.1%) | Do nothing |
| Down market | –25% | +5% | 51.7% / 48.3% | Yes (Equity –8.3%) | Buy ~₹72,000 equity (from debt/cash) |
Designer note (for infographic): Use #001344 (bars/lines), #a0acc1 (axes), #f0f9ff (background), labels in #506082, callouts in #bc9673 with text #ffd7ab.
Rebalancing methods (pick one and stick with it)
1) Calendar-based
- Rebalance at a fixed interval (e.g., annually).
- Simple, predictable, cost-efficient.
- Backed by research as a sensible baseline for many investors. (Vanguard)
2) Threshold-based (“bands”)
- Rebalance only when weights deviate beyond a band.
- Common rules: ±5 percentage points around target, or ±20% relative (e.g., 60% equity → band 48%–72%).
- Evidence shows threshold methods can be more return-friendly than strict calendar rules while controlling risk. (Vanguard)
3) Hybrid (calendar + threshold)
- Check annually; trade only if bands are breached. Often the best of both worlds.
4) Cashflow-aware
- Use SIPs/top-ups/dividends and STPs to steer back toward target, minimising taxable sales.
How often should Indian investors rebalance?
- Annual review is a practical default, with ±5% bands as guardrails. (Global evidence favours annual over too-frequent schedules for most investors. (Vanguard))
- Small- and mid-cap heavy portfolios may warrant semi-annual checks due to higher volatility.
- If you hold Aggressive Hybrid / Balanced Advantage Funds, the fund manager already rebalances within SEBI-mandated timelines; you mainly rebalance across asset classes (e.g., equity funds vs. debt/gold). (SEBI requires rebalancing within 30 business days for passive breaches; extension up to 30 days may apply. (Moneycontrol, Business Standard))
India-specific tax and rulebook essentials
This section is for awareness, not tax advice. Consult your CA for your facts.
- Listed equity & equity mutual funds:
- For transfers on/after 23 July 2024, LTCG rate is 12.5% with a higher annual exemption ₹1.25 lakh (earlier ₹1 lakh at 10%); STCG rate is 20% (earlier 15%). The new regime applies by date of transfer. (Press Information Bureau, Reuters, The Economic Times)
- Debt mutual funds with <35% equity (Section 50AA “Specified Mutual Funds”):
- Gains are deemed short-term and taxed at your slab, regardless of holding period (applies to units acquired on/after 1 April 2023). (AMFI India, DBS Bank)
- Mutual funds’ own rebalancing:
- SEBI/AMFI frameworks require schemes to restore allocations within defined windows after passive breaches (generally 30 business days; index funds/ETFs have specific norms). (Moneycontrol, Business Standard)
- Other costs: Brokerage, STT, stamp duty, and exit loads may apply; factor these before rebalancing.
Practical takeaway: To reduce tax drag, prefer cashflow-led rebalancing, tax-loss harvesting where permitted, and thresholds that avoid frequent small trades.
Where to implement rebalancing (India examples)
- Do-it-yourself: Rebalance your equity MF vs debt MF vs gold ETF split via lumpsum/SIPs/STPs.
- Advisory/PMS: Many advisors use policy portfolios with annual + threshold rebalancing and tax-lot optimisation for HNIs.
- NPS: In Auto Choice (LC25/LC50/LC75), the provider automatically rebalances your asset mix with age, capping equity and gradually shifting to bonds/G-Secs—this is rebalancing by design. (PFRDA PROD)
A 7-step, 90-minute rebalancing checklist
- Confirm targets: e.g., 60/30/10 (Equity/Debt/Gold).
- Pull weights: Use current market values; compute drifts (Δi\Delta_i).
- Decide rule: Annual + ±5% band (or a rule you can stick to).
- Use cashflows first: Redirect SIPs, invest fresh money to underweights.
- Harvest losses (if any): Offset gains where permissible.
- Execute minimal trades: Only enough to get back inside the band.
- Document: Keep a one-pager noting target, band, dates, and trades.
FAQs
Q1. Does rebalancing reduce returns?
Not necessarily. It’s a risk management tool first; sometimes it can improve risk-adjusted returns and behavioural discipline. Threshold-based methods often compare favourably to strict calendar rules. (Vanguard)
Q2. Do SIPs make rebalancing unnecessary?
SIPs help but don’t replace rebalancing. Over time, strong equity rallies can still push weights beyond your band.
Q3. Should I rebalance in a falling market?
Yes—your rules apply both ways. Buying beaten-down equities back to target is the logic that enforces buy-low.
Q4. How do mutual funds manage rebalancing?
Hybrid funds maintain allocations within SEBI-defined ranges and must rectify passive breaches within 30 business days (extensions possible), which means much of the asset-mix rebalancing is handled inside the scheme. (Moneycontrol)
Q5. What about NPS?
NPS Auto Choice rebalances your asset mix automatically as you age; equity starts higher and reduces gradually per lifecycle tables (LC25/LC50/LC75). (PFRDA PROD)
Key takeaways
- Rebalancing keeps risk aligned to your goals and avoids hidden drift.
- A simple annual + ±5% band works well for most Indian investors. (Vanguard)
- In India, post-2024 capital-gains rules make cashflow-aware and threshold-based rebalancing even more valuable to control tax drag. (Press Information Bureau, The Economic Times)
- Hybrid MFs and NPS already rebalance internally; your job is to set the overall asset-class mix and stick to your policy. (Moneycontrol, PFRDA PROD)
This article is educational. It is not investment or tax advice. Consider your risk profile, goals, and speak to a SEBI-registered advisor before acting.