Definition
Rebalancing
Rebalancing is periodically realigning your portfolio back to its target asset allocation by trimming what has grown and adding to what has lagged.
Over time, a rising asset class grows to exceed its target weight, raising portfolio risk; rebalancing sells some of it and buys the underweight assets, restoring the intended mix. This mechanically enforces 'buy low, sell high' and counteracts emotional, herd-driven decisions.
Investors rebalance on a schedule (say annually) or when an allocation drifts beyond set bands. In India, rebalancing has tax and cost implications, so it can be done thoughtfully — for instance, directing fresh SIP money toward underweight assets to reduce the need to sell. It is a disciplined, rules-based way to manage risk over the long term.
Related terms
- Asset AllocationAsset allocation is the decision of how to divide your portfolio among major asset classes — such as equity, debt, gold and cash — based on your goals, horizon and risk tolerance.
- Disposition EffectThe disposition effect is the tendency to sell winning investments too early to bank a gain, while holding on to losing investments too long to avoid realising a loss.
- DiversificationDiversification is spreading investments across different assets, sectors and geographies so that poor performance in one does not sink your whole portfolio.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.