What portfolio rebalancing is and why it matters

Your portfolio is made up of different assets and the balance of those assets (for example, 60% equities and 40% fixed income) reflects your risk appetite and overall investment objectives. Over time, price movements can upset the balance in your portfolio. This is called “asset allocation drift”. For example, if equities outperform, they may take up a bigger share of your asset mix and increase your exposure to volatility, and your portfolio may no longer reflect your stated appetite for risk.  

Rebalancing is the systematic process of adjusting your holdings so that your asset mix remains true to your investment objectives, time horizon and risk tolerance. Rebalancing may involve selling assets that weigh too heavily in a portfolio and buying underweight ones. Rebalancing also means if your portfolio needs to have certain new asset classes or themes as per the adviser or needs to avoid certain asset classes, then the portfolio is adjusted to include or avoid them. This disciplined approach helps keep your investment strategy on track.

COVID case study: Rebalanced vs non-rebalanced portfolio (source: NSE and JioBlackRock Investment Advisers)

The COVID-19 pandemic triggered a sharp fall in equity prices. In March 2020, Indian equity indices like the Nifty 50 and Sensex fell by more than 30%, causing significant asset allocation drift in investor portfolios.

• Rebalanced portfolio outcomes

Investors who adhered to a disciplined rebalancing strategy—rather than reacting impulsively —avoided panic selling during the COVID-19 crash. Instead of selling equities at depressed prices, they strategically reallocated funds to restore their target asset mix. By adding equities when valuations were low, these investors positioned themselves to benefit from the subsequent recovery. As Indian markets rebounded sharply in late 2020 and continued their upward trajectory into 2021 , rebalanced portfolios not only captured significant gains but also maintained alignment with the investor’s risk profile.

• Non-rebalanced portfolio outcomes

On the other hand, many Indian retail investors who did not rebalance saw their equity allocations swell during the pre-COVID bull market. The strong performance of Nifty and Sensex led to portfolios becoming equity heavy. When the COVID crash hit in 2020, these portfolios suffered disproportionately high losses due to overexposure to equities.

Source: NSE (Historical Index Data)

• Risk management: Rebalancing helps maintain your risk tolerance by preventing overexposure to any one asset class.
• Disciplined investing: It encourages a systematic approach to investing in asset classes in the right proportion to ensure the overall portfolio reflects your risk appetite and investment objectives.
• Diversification: Restoring the intended asset mix ensures your portfolio remains diversified, reducing the impact of poor performance in any single asset.
• Goal alignment: Rebalancing ensures your portfolio continues to reflect your current objectives and risk tolerance as your investment objectives evolve.

Note: Rebalancing does not guarantee returns, it helps maintain risk alignment.

It’s a strategic discipline that keeps your investments aligned with your long-term objectives. As markets shift and asset values fluctuate, your portfolio can drift from its intended allocation, exposing you to unintended risks or missed opportunities. Rebalancing acts as a corrective tool, restoring balance and empowering investors to stay on course, optimise performance and maintain a diversified, goal-driven investment strategy.