Investment 101: How to rebalance your portfolio for FY27 - top mistakes to avoid

Published 15 July 2026 · finance

A common mistake investors make is replacing mutual funds solely because they underperformed over a short period. (AI image) The author is CEO of Paisabazaar

A common mistake investors make is replacing mutual funds solely because they underperformed over a short period. (AI image) The author is CEO of Paisabazaar Why Do Portfolios Need a Periodic Review? Align their investment portfolios with their financial goals and risk appetite. Prevent a single high-performing stock or sector from dominating the entire portfolio. Trim overvalued assets and reinvest in areas that are expected to see notable growth. How Should You Rebalance Your Investment Portfolio? Review your financial goals & risk appetite Rebalancing portfolio - 6 simple steps Know your target allocation Compare current allocation with target allocation Decide what to add, trim or leave alone Add new funds or top up existing ones where the allocation is low. Stop new investments where the allocation is high. In such overweight asset classes, you may also redeem a small portion, if necessary. Switch but only when necessary. Replacing one investment with another can be considered only when your portfolio has drifted significantly from your target allocation or when an existing fund no longer meets your investment objectives due to consistent underperformance or a change in its strategy. Pay attention to the impact that various holdings have on your style-box positioning and sector weightings. Your stock portfolio doesn't need to be an exact clone of the broad market, but you should at least be aware of whether your portfolio is skewing heavily to one style or sector. Look beyond individual fund performance Review fund’s performance Consider taxes and exit costs How Often Should You Rebalance Your Investment Portfolio? When should you rebalance your portfolio? Common Rebalancing Mistakes to Avoid Here are some of the common mistakes that investors should avoid when rebalancing their investment portfolios Rebalancing too frequently Rebalancing portfolio: 5 Mistakes to avoid Making decisions emotionally Ignoring the whole picture Not reviewing your portfolio For many salaried individuals, a new financial year begins with bigger paychecks and bonuses. With higher income, the immediate instinct may be to invest in a new mutual fund scheme, increase SIP contributions or explore other investment avenues; but, it also presents a great opportunity to review and rebalance your current investment portfolio.

After all, your risk tolerance, financial goals and tax strategies may have changed over the past year. So, it would be prudent to ensure your portfolio is still where you want it to be.When building an investment portfolio, investors decide on an asset allocation. Let’s say, a portfolio comprising 70% equity and 30% debt investments. This allocation should be a well-thought out decision that an investor should make after considering his age, financial goals, income, risk tolerance, etc.Now, an asset class usually generates varying returns over a span of time. This varying performance across the asset classes causes the asset mix to deviate from its original or starting allocation. So, what started out as a 70:30 portfolio might shift to 80:20 in favour of higher equity exposure to meet financial goals.In other words, the asset mix could differ from one’s risk and return objectives and affect the achievement of investment goals. This is where you need to rebalance your investment portfolio. Portfolio rebalancing is simply an exercise for investors to ensure their investment portfolios remain aligned with their financial goals and risk appetite. It helps investors:Investors can rebalance their investment portfolio by following the following process:Like the stock market, life is also always in a state of constant flux.Therefore, reviewing your current situation, such as your financial goals is necessary to calibrate investment allocations and ensure your financial roadmap keeps pace with unexpected life changes or market shifts. You also need to reassess your ability to tolerate risks as this might have changed over time.For instance, a young investor with no dependents and financial liabilities may be more comfortable investing a larger portion of his income in equities than someone who’s approaching a major financial goal or retirement.Once you have reviewed and revised your financial goals, determine the target allocation as without this you wouldn’t know what you are rebalancing towards. Your target allocation should reflect your current situation. Therefore, when determining what percentage to have in stocks, gold, real estate and other asset classes, consider your remaining service years, income, financial goals, risk appetite and other influencing factors.Now that you have determined your optimal target allocation, it's time to look at your current asset allocation.