Portfolio Rebalancing and Why is it Important in Large and Mid Cap Funds?

If you think that once you have finished investing in large and mid cap funds, your work is over and now the compounding will potentially do its job, then the assumption is not entirely correct.

Large and mid cap funds are actively managed mutual funds with specific mandates and fund managers are responsible for rebalancing them to keep these allocations aligned with the fund’s objectives.

Individual investors can not manually rebalance large and mid cap fund holdings. The fund manager continuously monitors the scheme and makes necessary changes. However, individual investors should still review their overall investment portfolio periodically to ensure their mix of funds (across different asset classes or fund categories) fits their evolving personal financial goals and risk tolerance amid constantly changing market conditions.

To ensure that your investment remains aligned with your financial goals and risk tolerance amid the evolving market situation, a periodic rebalancing of the portfolio is necessary. And, in case your portfolio includes large and mid cap funds, this becomes all the more crucial as most investors in these funds typically have the objective of managing risks while seeking growth potential over the long term.

This article will help you explore the key aspects of rebalancing, including its purpose, frequency, indicators for timing, tools, mistakes to avoid and the role of an advisor.

• Table of contents

• Rebalancing in large and mid cap funds – significance
• Rebalancing portfolio – when to do?
• Time to rebalance – key signals
• Common mistakes to avoid during rebalancing
• Rebalancing – tools and techniques
• Rebalancing: Manually or advisor?
• How rebalancing can help in risk management

Rebalancing in large and mid cap funds – significance

Individual investors do not need to manually rebalance large and mid cap fund holdings. The fund manager continuously monitors the portfolio and makes necessary tweaks.

But investors must evaluate their overall portfolio and assess whether its overall composition (across various funds and other investments) still matches their unique goals and evolving risk appetite. This is because as markets and valuations change, the portfolio may skew from its original mandates.

In 2025, market volatility has risen due to multiple geo-political factors. As market fluctuations occur, the proportions of various assets in your portfolio can change. Rebalancing helps restore your intended asset allocation and ensure the portfolio remains aligned with your risk appetite and objectives.

Let’s check the key features of rebalancing to understand this better:

• Rebalancing helps restore original risk levels if market volatility causes drift.
• Rebalancing can ensure investments remain in sync with financial goals.
• It allows investors to book potential gains by selling appreciated assets.
• It may also mitigate concentration risk and prevent over-reliance on a single instrument or asset class.

Read Also: Difference Between Large Cap, Mid Cap, and Small Cap Funds

Rebalancing portfolio – when to do?

Annual, semi or quarterly rebalancing: A common approach where investors review and reset allocations once a year, month or quarter.

Threshold-based: Some investors rebalance only when asset allocations deviate beyond a certain limit by a predetermined percentage like 5%, 10% or 15%.

Combination: This is a combination trigger, which combines the time and threshold triggers.

Time to rebalance – key signals

Deviation from target allocation

If your original asset mix––such as 60% equity, 40% bonds––shifts significantly due to market movements, you can consider it as a signal to realign.

Market volatility

Sharp market swings, as we saw recently in 2025, can unbalance your portfolio, requiring rebalancing to maintain your intended risk/reward ratio.

Changed financial goals

Major life events like marriage or buying a home may need you to shift from aggressive to conservative investments.

Risk tolerance shift

As you age or your circumstances change, you may need relatively more stable assets that prioritise preservation of capital and steady income potential.

Consistent underperformance

Persistent under-performance in any asset class warrants reconsidering your exposure.

Common mistakes to avoid during rebalancing

Focusing only on underperformers

Rebalancing should address not only current underperformers but also current out-performers that may potentially carry downside risk in the future.

Letting emotions rule

Avoid personal biases and follow a rule-based, objective approach rather than relying on assumptions or social media.

Skipping expert advice

Consulting a financial advisor adds value, offering personalised insights and potentially helping you avoid errors.

Ignoring tax impact

It is important to consider STCG/LTCG taxes and transaction costs before rebalancing.

Forgetting financial goals

Always align rebalancing with your long-term goals and upcoming milestones to avoid liquidity or growth setbacks.

Read Also: Retirement Planning with Large Cap & Mid Cap Fund

Rebalancing – tools and techniques

Calendar-based rebalancing

In calendar-based rebalancing, you assess your portfolio at fixed intervals which is monthly, quarterly, half-yearly or annually, based on your risk profile. However, keep in mind that buying or selling securities may incur transaction costs, which should be considered before making adjustments.

Market cap-based rebalancing

This method involves rebalancing based on allocations to each market capitalisation (large cap, mid cap or small cap stocks) in your mutual fund portfolio. For instance, if you originally invested 40% in large cap stocks and 60% in bonds and now wish to take more risk, you could shift to 20% in mid-cap, 20% in large cap and maintain 60% in bonds.

The shift increases your exposure to potentially higher-growth (but higher-risk) mid cap stocks, aligning the portfolio with your updated risk appetite.

Ratio-based rebalancing

In ratio-based rebalancing you change the equity-to-debt ratio as per your evolving risk appetite. For example, moving from a 40:60 stock-to-bond ratio to 70:30 if you prefer taking on more risk for higher return potential.

Rebalancing: Manually or advisor?

Manual rebalancing may be suitable if:

• You are experienced with mutual fund products.
• You actively monitor your investments.
• You understand taxation and exit load rules.

Using an advisor might be preferable if:

• You need help with goal planning.
• You prefer expert-led execution.
• You want to avoid emotional bias during volatile markets.

How rebalancing can help in risk management

Maintains asset allocation

Rebalancing in mutual funds can ensure the original mix of large and mid-cap exposure remains intact.

Reduces volatility

Through rebalancing, you can limit overexposure to relatively riskier assets mid-caps, especially during bull runs.

Prevents emotional investing

Rule-based rebalancing encourages disciplined decision-making and may curb investors from making emotionally-driven investment choices.

Read Also: Why Multi-Cap Funds Could Be Your Best Investment in 2025

Conclusion

Rebalancing plays a crucial role in maintaining a balanced and goal-aligned investment strategy as one’s risk appetite, goals and market conditions evolve. While large and mid cap funds are internally handled by fund managers, it is crucial for investors to monitor their overall portfolio allocations across investments. This can ensure that the broader portfolio continues to reflect their investment objectives and changing risk tolerance.

FAQs:

What is rebalancing in large and mid cap mutual funds?

Rebalancing is the process of realigning the proportion of investments in large and mid-cap funds to maintain the intended asset allocation and risk level of the overall portfolio.

How frequently should I rebalance my mutual fund portfolio?

You may consider rebalancing annually, semi-annually or based on a threshold deviation from your original allocation.

Does rebalancing affect the returns of large and mid-cap funds?

Rebalancing in large and mid-cap funds is done internally by fund managers. The main objective is to manage risk and maintain consistency. So, yes, rebalancing does have an impact on the return potential.

Are there any costs or tax implications involved in rebalancing?

Yes, rebalancing the portfolio may incur exit loads and capital gains taxes depending on the timing and amount of the transaction.

Can I automate rebalancing for my mutual fund investments?

Yes, several platforms and advisors offer automation tools like STPs and Robo-advisory services that help with periodic rebalancing.