Rebalancing
Restoring a portfolio to its target weights by selling what has grown beyond them and buying what has fallen below.
Formula
Test: weights are returned to target on a schedule, or whenever a weight drifts beyond a stated tolerance band
Unit
%
In depth
Rebalancing is primarily a risk control, not a return enhancer: without it, the best-performing and usually riskiest asset grows to dominate the portfolio, so risk rises without any decision being taken. It systematically sells what has done well and buys what has done badly, which is contrarian by construction and psychologically difficult. Threshold rebalancing, triggered by a drift band rather than a date, generally beats calendar rebalancing on costs. In India each rebalancing sale is a taxable event, so the tax cost must be weighed against the risk being controlled.
Worked example
A 60/40 portfolio left alone through a strong five-year equity run drifts to 78/22. The investor is now taking substantially more risk than chosen, without ever having decided to.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Rebalancing” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.