Rebalancing a Portfolio: When, How Often and How Far
- How drift happens
- What rebalancing looks like
- Rebalancing without selling
- How often: calendar or threshold
- How far to go
- What counts as the portfolio
- When to change the target itself
- Where this fits
Rebalancing means bringing your portfolio back to the mix of assets you chose, usually by moving money from what has risen to what has lagged. Without it, a portfolio drifts towards whatever has performed best, which quietly raises its risk. Most investors do well with a simple rule: check once a year, and rebalance if any asset class is more than about five percentage points from its target.
The purpose is risk control, not higher returns. Rebalancing keeps the portfolio at the level of risk you decided you could live with.
How drift happens
An investor sets a target of 60% equity and 40% debt, and starts with ₹20 lakh: ₹12 lakh in equity funds and ₹8 lakh in debt.
Over a strong year, equity rises 30% and debt earns 7%.
| Start | After one year | |
|---|---|---|
| Equity | ₹12.00 lakh (60%) | ₹15.60 lakh (64.6%) |
| Debt | ₹8.00 lakh (40%) | ₹8.56 lakh (35.4%) |
| Total | ₹20.00 lakh | ₹24.16 lakh |
Nothing was bought or sold, but the portfolio is now nearly 65% equity. Two or three more good years and it could be 75%, which means a market fall would hurt far more than the investor planned for, often at exactly the point when the gains feel most secure.
What rebalancing looks like
To return to 60:40 on ₹24.16 lakh, equity should be ₹14.50 lakh and debt ₹9.66 lakh. That means moving about ₹1.10 lakh from equity to debt.
It feels uncomfortable, because it means selling what has done well and buying what has not. That discomfort is the point: rebalancing enforces a mild discipline of selling high and buying low that most investors struggle to follow on instinct.
Rebalancing without selling
Selling has costs: possible exit loads, and a tax liability on gains, which depends on the asset, the holding period and the rules in force for the year. Before selling, look for ways to rebalance with new money instead.
- Redirect new contributions. Send the next several months of SIP money entirely to the underweight asset until the mix is back on target.
- Direct lump sums. A bonus or maturity proceeds can go wholly to the underweight side.
- Take withdrawals from the overweight side. In retirement, draw income from whichever asset is above target.
For the example above, new money has to do more than the ₹1.10 lakh a sale would move, because it also enlarges the portfolio: about ₹1.84 lakh must go to debt, so sending a ₹20,000 monthly SIP entirely to debt would restore 60:40 in about nine months, ignoring returns in the meantime, with no sale at all.
How often: calendar or threshold
Calendar rebalancing means checking on a fixed date, for example every April, and rebalancing back to target if needed. It is simple and easy to remember.
Threshold rebalancing means acting whenever an asset class moves more than a set amount from target, such as five percentage points. It responds to large market moves when they happen rather than waiting.
A practical combination for most people: review once a year, and act only if the drift exceeds the threshold. That avoids frequent small trades, which add cost and effort without meaningfully reducing risk, while still catching large drifts.
| Approach | Strength | Weakness |
|---|---|---|
| Annual, always rebalance | Simple, disciplined | Can trigger small, unnecessary trades |
| Threshold only | Acts on large moves | Needs regular monitoring |
| Annual check plus threshold | Low effort, catches meaningful drift | May leave moderate drift for a year |
How far to go
You do not always have to go all the way back to target. Some investors rebalance only halfway to the target, or to the edge of the threshold band, especially when selling would create a large tax bill. Getting close to your intended risk matters more than precision.
Costs also argue against perfection. Each sale may carry an exit load and a tax liability, and a small drift of one or two points changes the portfolio’s risk very little. If the amount you would move is small relative to the portfolio, it is usually better to fix it with the next few months of contributions than to sell anything. Keep a short note of each rebalancing decision and the reason for it, so that next year’s review starts from a record rather than from memory.
What counts as the portfolio
Include everything that serves the same long-term goals: equity and debt mutual funds, shares, provident fund balances, PPF, fixed deposits earmarked for the goal. Leave out your emergency fund and money set aside for near-term spending, which should not be rebalanced into equities.
Provident fund and PPF balances count as debt, and they can be large. An investor who ignores them may think they are 60:40 when their full long-term portfolio is much more conservative.
When to change the target itself
Rebalancing restores a target. It does not decide it. The target should change for reasons in your life, not in the market: a shorter time to the goal, a change in income stability, or retirement approaching. Changing the target because equities have had a great year is not rebalancing. It is performance-chasing.
Where this fits
- Why the order of returns matters later: sequence risk in retirement
- Choosing the assets: FD vs debt mutual fund · active vs index fund
- Measuring what you earned: XIRR or CAGR
- Planning the mix for a goal: goal planning calculator