We have discussed earlier, the essence of managing your portfolio is allocation to various investment assets e.g. equity, debt, gold, etc., as per your investment objectives, risk appetite and investment horizon. We have also discussed earlier, your investment portfolio, once constructed, should be reviewed from time to time. There is no defined frequency for review; it may be say quarterly, or on major market events. Today we will discuss portfolio rebalancing, which is modifying your portfolio upon a review.
A portfolio review, as the term suggests, is a review. It need not necessarily lead to changes in your portfolio. People have a mindset that in a review, keep the funds/investments that are doing well and weed out the ones that are not doing well. However, that is only a minor purpose of a portfolio review. Investments or funds that are not doing well need not be eliminated immediately; these should be given adequate time to perform. Rather, if there is any significant change in your fundamentals e.g. increase in earnings, change in family e.g. marriage, birth, death, etc. – are events that should be the major considerations of a portfolio review.
Rebalancing is tweaking your portfolio composition — sell some, buy some. The point is, a review is a check whether your portfolio needs any tweaks, but a review need not necessarily lead to changes. When you make changes to your portfolio, that is rebalancing.
Portfolio rebalancing has certain powerful benefits that are not so well appreciated. Let us say you intended to construct a portfolio of 60% equity, 30% debt and 10% gold. Over a period of time, the equity market performed well, and your allocation ratio changed to 70% in equity and relatively lesser in the other assets. Debt also gave returns in this period but less than equity, hence the ratio of debt became lesser. Since 60-70% is a significant deviation, you do a rebalancing of your portfolio. You sell some equity components, bring it to 60% and increase the allocation to other assets to bring those to 40%.
We all know that no one can call the peak of the market i.e. when you should book profits. In portfolio rebalancing, you are reducing your allocation to the asset that has run up, and thereby you are booking profits. You will do this when that investment has run up, hence you may not be catching the peak but doing it during the bull run. The counter-argument is, after you book partial profits to come back to the intended allocation, that asset may run up further. As an example, equity may extend the rally, which you will miss partially, to the extent you have exited. It is here you have to understand that the market is not in your control, only your portfolio is. If you do not do the rebalancing when required, you would be running a higher risk than your appetite.
Similarly, when one asset has not done well, you would buy more at lower levels during rebalancing. In our illustration, if equity market is going through a correction and your allocation to equity has reduced to 50%, and debt and gold allocation has increased to 50% on moderate returns, it is time for rebalancing. When you are buying more equity to bring it back to 60%, you are buying equity at relatively lower prices.
While rebalancing your portfolio, look at it in totality. As an illustration, your debt allocation is not just your debt mutual funds, but also your bank deposits, EPF, PPF, etc. Gold jewellery is meant for consumption i.e. wearing; though it has financial worth, it is not usually meant for selling or booking profits. The 10% allocation to gold mentioned earlier should be in gold ETFs or gold funds of mutual funds or Sovereign Gold Bonds. In the next bull or bear run in equity, you should take rebalancing action as discussed.
(The writer is a corporate trainer (financial markets) and author)
Published – December 01, 2025 06:27 am IST
