The short answer: Mutual fund rebalancing changed the ride more than the result. Put ₹1 crore into a 60:40 mix of a Nifty 50 index fund and a 10-year gilt fund on 28 November 2014, and run it three ways to 19 October 2026. Left alone it became ₹2.79 crore. Rebalanced once a year it became ₹2.81 crore after tax. Kept inside a 5-point band it became ₹2.82 crore after tax. The endings were within 1.5% of each other. What differed was the ride: the never-rebalanced mix drifted to 69% equity in September 2024.
Investor note, October 2026. Written and reviewed by the Krishna Vriddhi Capital research desk. Updated 21 October 2026. 6 minute read.
| Item | Detail |
|---|---|
| Portfolio | 60% Nifty 50 index fund, 40% 10-year gilt fund, direct growth plans; AMFI NAVs; names withheld |
| Strategies | Never rebalance; rebalance each year on the first trading day on or after 28 November; rebalance when equity closes at or beyond 55% or 65% |
| Tax | Applied to each rebalance sale: equity gains held over a year at 12.5% beyond ₹1.25 lakh a year, shorter-held at 20%; gilt gains at a 30% slab; oldest units sold first |
Key takeaways
- Mutual fund rebalancing was a risk habit here, not a return trick: the three endings are close.
- Doing nothing is not passive. The market chose the allocation: 69% equity at the peak, near 64% at the end.
- Rules that act in a crash will sometimes act too early. The band rule bought equity twice in March 2020, before the bottom.
What is rebalancing in mutual funds?
Suppose you split your money 60% in equity funds and 40% in debt funds. Over time the equity part usually grows faster, so the split drifts, say to 69:31, and you carry more risk than you chose. Rebalancing in mutual funds means selling some of what grew and buying some of what lagged to get back to 60:40. It can be done on a fixed date, or only when the split moves past a set band.
Mutual fund rebalancing vs doing nothing: the twelve-year tally
| Measure | Never rebalanced | Rebalanced yearly | 5-point band | Equity fund alone |
|---|---|---|---|---|
| Final value of ₹1 crore | ₹2.79 crore | ₹2.81 crore | ₹2.82 crore | not shown |
| Annualised return | 9.00% | 9.07% | 9.12% | 9.63% |
| Annualised volatility | 9.8% | 9.8% | 10.2% | 16.4% |
| Fall in the March 2020 crash | -21.5% | -22.3% | -24.5% | -38.4% |
| Rebalances | 0 | 11 | 7 | not applicable |
| Tax paid on rebalancing | 0 | ₹1.88 lakh | ₹3.62 lakh | not applicable |
The yearly rule’s tax was 0.67% of the final value and the band rule’s 1.28%. The gilt fund alone returned 7.96% a year with a worst fall of 4.7%.
How does mutual fund rebalancing work in a crash? March 2020
The band rule rebalanced into equity on 2 and 17 March 2020, before the 23 March bottom, which is why it fell furthest of the three mixes. It did what it was designed to do: it bought the dip. It simply bought it twice before the dip was done. That is the price of never having to decide in a panic.
How to rebalance a mutual fund portfolio, and how often?
This test compares two rules: reset once a year on a fixed date (11 trades in 12 years), or reset only when the equity share closes at or beyond 55% or 65% (7 trades). The first is simpler to follow. The second trades less often but acts in a crash, which is what happened in March 2020. Mutual fund rebalancing frequency is a choice between simplicity, trading cost and tax; the endings here were within 1.5% of each other.
Mutual fund rebalancing tax: what did it cost?
In a taxable account each sale can create a capital gain. Here the yearly rule paid ₹1.88 lakh of tax over 11 trades, 0.67% of the final value, and the band rule paid ₹3.62 lakh over 7 trades, 1.28%. The band rule paid more mainly because two gilt sales in March 2020, taxed at the 30% slab, cost ₹1.81 lakh, and a ₹13.11 lakh equity sale in December 2023 cost ₹0.86 lakh. Tax rules change; confirm your own position with a tax professional.
What this says about mutual fund rebalancing
The disciplined portfolios ended roughly where the lazy one did, but they never let a 60:40 plan become a 69:31 reality. Whether that is worth 11 trades and ₹1.88 lakh, or 7 trades and ₹3.62 lakh, depends on the investor. What is hard to defend is the option most people actually choose: intending to rebalance and never getting around to it.
Historical simulation on actual NAVs and the tax rules stated, applied to the whole period. Illustrative only: it uses an assumed ₹1 crore starting amount and an assumed tax treatment, as stated above, and it is not a forecast of future returns. Tax rules change. It does not recommend any allocation or scheme.
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Questions people ask
What is portfolio drift?
When one part of a portfolio grows faster than another, its share rises. A 60:40 mix left alone can end up 69:31 without a single trade.
What is rebalancing in mutual funds?
Mutual fund rebalancing means selling some of what has grown and buying some of what has lagged to bring the mix back to its target. It can be done on a date, or when the mix strays past a set band.
Does mutual fund rebalancing cost tax?
In a taxable account, yes: each sale can create a capital gain. In this simulation the yearly rule paid ₹1.88 lakh over 11 trades and the band rule ₹3.62 lakh over 7, under the rules stated above. Tax rules change; confirm your position with a tax professional.
How often should I rebalance my mutual funds?
This note does not recommend a frequency. It compares a yearly reset with a 5-point band and shows each rule’s trades and tax. Many investors choose a rule they will actually follow, and write it down.
How to rebalance a mutual fund portfolio?
Compare your current split with your target. Investors then either sell some of the fund that has grown and buy some of the one that has lagged, or direct new SIP money to the lagging one to avoid a sale. Switching between funds counts as a sale for tax purposes. This note does not recommend either; a call with a founder can show your own split.
Which rule is better?
This note does not say. The endings were within 1.5% of each other. It shows what each rule cost in trades and tax and how each behaved in the March 2020 crash.
Sources
AMFI daily NAVs (amfiindia.com) via mfapi.in, 28 November 2014 to 19 October 2026 (Nifty 50 index fund, direct growth, AMFI code 120716; 10-year gilt fund, direct growth, AMFI code 131061). Calculations by the Krishna Vriddhi Capital research desk.
Investor education only. Mutual fund investments are subject to market risks; past performance is not indicative of future returns. Not investment advice or a recommendation of any scheme. More notes are in the research library.