Did you know that rebalancing your portfolio annually may be one of the most effective strategies for most investors? Research shows that rebalancing too frequently doesn’t necessarily improve returns and may even reduce them due to higher costs.
While many investment guides recommend reviewing and rebalancing your asset allocation at least once a year, studies suggest that annual or threshold-based rebalancing is generally more efficient than doing it monthly or quarterly.
In this article, we’ll explain what portfolio rebalancing means, why it is important, the different strategies available, and how Indian investors can effectively manage it while minimizing costs and taxes.
What is Portfolio Rebalancing?
Portfolio rebalancing is the process of realigning your investment portfolio back to its intended asset allocation. Over time, due to market fluctuations, certain investments grow faster than others, causing your portfolio to drift away from your original risk profile.
For example, if your portfolio started with 60% equity and 40% debt and equity markets rallied, you might suddenly find yourself with 70% equity exposure. This increases risk beyond your comfort zone. Rebalancing helps bring it back to the original 60:40 mix.
Why Rebalancing Your Portfolio Matters
- Keeps Risk in Check
Market fluctuations often cause your portfolio’s equity exposure to increase during bull runs, making it riskier than intended. Rebalancing helps reduce overexposure to equities and protects against sharp market corrections.
- Maintains Your Target Asset Allocation
Your initial allocation is based on your goals, risk appetite, and time horizon. Rebalancing ensures your portfolio stays aligned with these factors.
- Encourages Disciplined Investing
Rebalancing forces you to “sell high and buy low”, trimming profits from outperforming assets and reallocating them to undervalued ones—a strategy that historically benefits long-term investors.
Popular Rebalancing Strategies
🔹 Calendar-Based Rebalancing
Reviewing and rebalancing your portfolio at fixed intervals (e.g., annually or semi-annually) regardless of market conditions.
✔ Pros: Simple, low effort.
✘ Cons: May miss sudden allocation drifts.
🔹 Threshold-Based Rebalancing
Rebalance only when an asset class deviates beyond a set range (e.g., ±5% of target allocation).
✔ Pros: Reacts only to significant changes.
✘ Cons: Requires regular monitoring.
🔹 Hybrid Approach
A combination of the above—review quarterly but rebalance only if deviations cross set limits.
🔹 Dynamic Strategies (Advanced)
Techniques like Constant Proportion Portfolio Insurance (CPPI) adjust risk exposure based on portfolio value. While more complex, these are usually better suited for high-net-worth investors working with advisors.
How Often Should You Rebalance?
Annual rebalancing is adequate for most Indian investors.
Semi-annual reviews may suit larger portfolios or those nearing retirement.
Threshold-based adjustments work best in volatile markets.
Costs and Tax Implications in India
🔹 Transaction Costs
Each buy/sell order incurs brokerage fees, STT (Securities Transaction Tax), and other charges. Rebalancing too frequently can erode returns.
🔹 Capital Gains Tax
Equity (Shares/Equity Mutual Funds):
Short-term (≤12 months): 15% tax on gains
Long-term (>12 months): 10% tax on gains above ₹1 lakh annually
Debt Mutual Funds: Taxed as per slab rate (post-2023 changes).
🔹 Tax-Efficient Rebalancing
Use new investments (SIP/STP) to rebalance without selling.
Rebalance within tax-advantaged accounts like PPF, EPF, or NPS where applicable.
Consider tax-loss harvesting to offset gains.
Rebalancing Across Life Stages
Early Career (20s–30s): Higher equity (80–90%), rebalance annually.
Mid-Career (40s–50s): Shift gradually to 60–70% equity; semi-annual reviews.
Pre-Retirement (55+): Reduce equity exposure, focus on stability and income.
Key Takeaways
Rebalancing helps manage risk, maintain asset allocation, and enforce discipline.
For most Indian investors, annual or threshold-based rebalancing is optimal.
Be mindful of costs and taxes—they can reduce net returns significantly.
Consistency is key: pick a strategy and stick to it across market cycles.
Bottom Line
Portfolio rebalancing is not about timing the market—it’s about staying aligned with your financial plan. A disciplined approach ensures your investments remain on track, reduces risk during volatility, and supports steady wealth creation over time.
