Explained: What is rebalancing and when should you go for it?
Rebalancing is a term used in context to maintaining your asset allocation, which is the process of investing money in more than one type of asset in order to balance out your overall investment risk.
Often at the start of your investment journey you may set out a strategic asset allocation that is the basic framework of assets you need to achieve your goals. For example, suppose you start off by investing 60% in equity and 40% in debt, but a year later your allocation moves to 65-35% due to high equity returns, it may be time to think about rebalancing.
Rebalancing is an adjustment you will have to make to bring the allocation back to the 60-40% level. At the simplest level, you can sell some equity and reinvest it in debt. But you can also rebalance across 3-4 asset classes.
Be careful not to rebalance too often. There are costs like fees and taxes when you sell and buy financial products. Rebalancing, say, every 3 months will be costly. Also, rebalancing for every 1-2% change in asset allocation isn’t required. Usually, advisors recommend a review once a year and unless the asset allocation has changed by more than 5-10%, it may not warrant a change.
Source : Live Mint