How does Portfolio Rebalancing happen?

Let us understand the importance of asset rebalancing with the help of an example. Let us assume you invested Rs 1 lakh in the proportion of 70% equity and 30% debt in 1998. In the first example, you only did a one-time asset allocation at the time of your investment. In the second example, you were rebalancing your portfolio every year to bring back the asset allocation to 70% equity and 30% debt. If equity allocation exceeded 70% equity any year, you sold equity and bought debt to keep asset allocation at your target. Similarly when equity allocation was below 70%, you sold debt and bought equity to keep asset allocation at 30%.

In these two examples, we will use Nifty 50 as the proxy for equity and Nifty 10 year G-Sec Index as the proxy for debt. Let us see how your investment would have grown over the last 20 years without any rebalancing. Your investment’s market value at the end of 2019 would have been around Rs 9.7 lakhs. However if you would have done annual rebalancing the value would have grown to 12.5 lakhs, an incremental gain of 2.7 lakhs.

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