Rebalancing is the process of keeping the risk-return distribution of a portfolio in check with the planned proportions over time. It is a common technique used to maintain the asset allocation of your goal or overall portfolio.
Let's assume that you were recommended a portfolio of 50% equity and 50% debt in which you had invested a lumpsum plus a monthly SIP. Over the next six months, the equity markets perform very well, and as a result, even though you are investing in the 50-50 ratio, your portfolio's value based on NAVs today makes it 60% equity and 40% debt. Conversely, in a bear market, the current value of your portfolio could become 45% equity and 55% debt. In either situation, rebalancing helps to bring the portfolio back to its intended asset class distribution.
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