Definition of Rebalancing
Rebalancing is the process of realigning your investment portfolio back to your original target asset allocation after market movements have shifted the actual allocation. For example, if you want 70% equity and 30% debt, but strong equity markets push your allocation to 80% equity, you would sell some equity and buy debt to restore the 70:30 ratio.
Rebalancing has two main benefits: it maintains your intended risk level, and it forces you to systematically 'sell high, buy low' — selling the asset class that has appreciated and buying what has underperformed. Most financial advisors recommend rebalancing once a year or when allocation drifts by more than 5–10%.
Important tax consideration for Indian investors: rebalancing in a taxable account triggers capital gains tax. Consider rebalancing via new contributions (SIP direction) rather than selling, or use instruments with no capital gains on rebalancing (like NPS or certain ULIPs).