Why Rebalancing is the Most Ignored Step in Wealth Creation

When most investors think about building wealth, they focus on picking the right mutual funds or increasing SIP amounts. But one crucial step that quietly shapes long-term results often gets ignored — rebalancing.

What is Rebalancing?

Rebalancing means bringing your portfolio back to its original allocation between equity, debt, and other assets.

For example, if your plan was to hold 70% in equity and 30% in debt, and after a strong market rally your portfolio becomes 80% equity and 20% debt, you need to sell some equity and reinvest that amount in debt funds to restore the 70:30 balance.

It’s not about maximizing short-term gains. It’s about controlling risk and preserving returns over time.

Why Most Investors Ignore It

1. Emotional attachment: Selling a well-performing equity fund feels counterintuitive.

2. Lack of awareness: Many investors don’t track asset allocation drift; they only see overall portfolio growth.

3. Complacency: If the portfolio is making money, they assume nothing needs fixing.

This neglect gradually tilts the portfolio toward higher risk — which works well in bull markets but causes sharper losses when markets correct.

Example: The Impact of Not Rebalancing

Let’s say you started investing ₹10 lakh in January 2020 —

• ₹7 lakh in equity funds (70%)

• ₹3 lakh in debt funds (30%)

Now assume by January 2025, equity markets have surged while debt delivered modest returns. Your portfolio might look like this:

• Equity value: ₹13.3 lakh

• Debt value: ₹3.5 lakh

• Total portfolio: ₹16.8 lakh

• New allocation: 79% equity, 21% debt

Your portfolio has become far more aggressive than intended. If a 20% correction hits equities, your total value could fall to ₹14.1 lakh.

But if you had rebalanced annually, trimming equity every year to maintain 70:30, you would’ve booked partial profits during rallies and reinvested in debt. Over time, that reduces volatility and protects capital during market falls — often leading to better risk-adjusted returns.

Why Rebalancing Matters

• Maintains Risk Discipline: Keeps your exposure aligned with your comfort level.

• Books Profits Systematically: You sell high-performing assets at peaks.

• Reduces Emotional Bias: Forces a rules-based approach to investing.

• Improves Consistency: Smooths long-term returns without frequent market timing.

How Often Should You Rebalance?

There are two proven methods:

• Time-based: Rebalance once a year, ideally in a fixed month (e.g., April).

• Threshold-based: Rebalance when allocation drifts by 5–10% from your target.

Most investors can combine both — review once a year and rebalance only if the deviation crosses 5%.