Rebalancing refers to the act of realigning the proportion of assets or investments in a portfolio. Portfolio rebalancing enables investors to maintain the desired asset allocation mix. It is done by periodically buying or selling assets. This process minimizes the risk of “portfolio drift” and the consequent increase in the risk factor.

For example, the target allocation for an investor is 50% equity funds and 50% debt funds. Post completion of one year, it may so happen that the equity funds over-performed and hence are now at a 60% weightage in the portfolio. The investor in order to adhere to the 1:1 mix may decide to sell some equity funds and invest the amount in debt funds.