Portfolio Rebalancing: When and How to Rebalance Your Investment Portfolio

Last Updated on April 21, 2026 by Hemant Beniwal

“The investor’s main problem, and even his worst enemy, is likely to be himself.” – Benjamin Graham

A client called me in November 2020. Markets had recovered sharply after the March crash. His portfolio, which was 60% equity and 40% debt when we built it, had drifted to nearly 75% equity. He wanted to know whether to let it run.

This is the question that separates disciplined investors from lucky ones. The answer is almost always the same: your original asset allocation exists for a reason. When the portfolio drifts significantly from it, you restore it – regardless of what markets are doing, regardless of how good the momentum feels.

Research across multiple markets consistently shows that 90% of portfolio returns come from asset allocation – not stock selection, not market timing, not fund manager skill. The 10% that comes from those factors gets far more attention than it deserves. Rebalancing is how you protect the 90%.

What Is Portfolio Rebalancing?

Rebalancing is the act of comparing your portfolio’s current asset allocation to your original intended allocation, and then buying or selling to restore the original mix.

Consider a simple example. You start with 60% equity and 40% debt. After a strong equity market year, your equity has grown to 70% of the portfolio. To rebalance, you sell equity (or redirect new investments into debt) until the allocation returns to 60-40.

Most advisors attach a threshold to this – typically 5%. So if your equity drifts to 65%, you hold. If it drifts to 67% or more, you rebalance. The threshold prevents unnecessary transaction costs and tax events from minor fluctuations while ensuring you act on meaningful drift.

“Rebalancing is uncomfortable by design. You are selling what has performed well and buying what has underperformed. That feels wrong. But that is exactly what it means to buy low and sell high – the most fundamental principle in investing, done systematically rather than through guesswork.”

– Hemant Beniwal, CFP, CTEP | Founder, RetireWise

When Should You Rebalance?

There is no single right answer, but here are the clear triggers.

Annual review. Under normal market conditions, review your allocation once a year. If it has drifted more than 5-10 percentage points from your target, rebalance. If it has not, leave it alone.

After major market moves. When markets fall sharply – as in March 2020 – your equity allocation may drop well below target. This is the rebalancing trigger most investors ignore, because buying equity during a crash feels terrifying. But that is precisely when rebalancing is most valuable: you are buying equity at lower prices.

When your life circumstances change. A new goal, a job change from salaried to freelance (irregular income requires more stability in the portfolio), a health event, a significant inheritance, or approaching retirement all warrant a portfolio review and possible rebalancing to a new target allocation.

When your risk capacity genuinely changes. Not your emotions – your actual capacity. A 55-year-old with 5 years to retirement genuinely has less capacity for a prolonged equity drawdown than they did at 45. That is a legitimate reason to rebalance toward a more conservative allocation.

How to Rebalance: Three Approaches

Constant-weight rebalancing. This is what most structured advisors use. Set a target allocation (e.g., 60% equity, 40% debt). Set a threshold (e.g., 5%). Whenever any asset class drifts beyond the threshold, restore the original allocation. Simple, systematic, and unemotional.

Strategic asset allocation with glide path. This approach maintains a long-term target allocation but adjusts it at defined life stages. A 35-year-old might hold 70% equity. By 50, this drops to 55%. By 60, it reaches 35-40%. This is especially important for retirement planning – the gradual shift protects the corpus as withdrawal date approaches.

Tactical adjustments within limits. Some investors take a more active view – increasing equity during corrections and reducing it near market peaks. This requires more attention and discipline, and the evidence on whether it adds value over simple constant-weight rebalancing is mixed. For most investors, constant-weight is better.

What to Watch When Rebalancing

Tax implications matter. In India, equity fund gains held over one year are taxed at 12.5% (LTCG above Rs 1.25 lakh threshold). Short-term gains are taxed at 20%. Selling recently purchased equity to rebalance can create unnecessary tax events. Where possible, use new inflows for rebalancing rather than redemptions – direct new SIPs toward the underweight asset class instead of selling the overweight one.

Exit loads matter. Many equity funds have 1% exit loads for redemptions within one year. If you are rebalancing within a year of purchase, factor this in.

Rebalancing through new investments is the most tax-efficient approach. If your equity has grown above target, pause the equity SIP and direct the same amount to a debt fund for a few months until the allocation normalises. This avoids redemption entirely.

Read – Investment Vehicles and Gears: Matching Your Investments to Your Goals

Read – Beta in Mutual Funds: What It Means for Your Retirement Portfolio

Frequently Asked Questions

If markets are falling, should I rebalance into equity even though it feels risky?

Yes – this is exactly what rebalancing requires, and it is why most investors find it difficult. When equity falls sharply, your allocation to equity drops below target. Rebalancing means buying more equity at lower prices to restore the target. This is the mechanical implementation of “buy low” – done not because you are predicting a recovery, but because your plan calls for a specific allocation. Over long periods, investors who rebalanced through corrections consistently outperformed those who did not. The discomfort is the mechanism working correctly.

How much does it cost to rebalance? Is it worth it?

The costs are exit loads (typically 0-1%), tax on gains, and brokerage (negligible for mutual funds). These can be minimised by rebalancing through new flows rather than redemptions wherever possible. The benefit – maintaining your intended risk level and systematically buying low/selling high – typically outweighs the cost. Studies of Indian and global portfolios consistently show that rebalanced portfolios outperform unmanaged portfolios over 10-20 year periods, even after transaction costs.

How do I calculate my current asset allocation?

List every investment by current value: equity mutual funds, direct stocks, PPF (treat as debt), FDs, debt mutual funds, gold, real estate (exclude primary residence). Add up the equity total and debt total separately. Divide each by the grand total to get percentages. Many investors are surprised by this exercise – they believe they are moderately allocated but discover they are heavily equity-concentrated or, more commonly for Indian investors, heavily debt-concentrated with inadequate equity exposure for their retirement timeline.

Rebalancing is not exciting. It does not involve market calls, stock picks, or special insight. It is a disciplined, scheduled maintenance activity – like changing the oil in your car. The investors who do it consistently, without emotion, are the ones whose portfolios arrive at retirement looking the way they were supposed to look when they were built 20 years earlier.

Build the plan. Stick to the allocation. Rebalance when it drifts. That is it.