How to Rebalance Your Mutual Fund Portfolio in India (2026): When to Do It, and How to Keep the Tax Bill Near Zero
By Nitish Bharadwaj · Published Sep 28, 2026 · 7 min
Rebalancing means bringing your equity, debt and gold mix back to the target you chose, selling what has grown too big and adding to what has shrunk. Once a year, or whenever an asset class drifts more than five percentage points, is enough for most investors. In India every switch counts as a sale, so it can trigger short-term capital gains at 20%, long-term gains at 12.5% above ₹1.25 lakh, and exit loads. Redirecting fresh SIPs, using the yearly exemption and avoiding sales within a year keep the cost low.
Say you started with ₹10 lakh split 60:40 between equity and debt funds. After two strong years for stocks, equity may be worth ₹9 lakh and debt ₹4.8 lakh, and your mix is now about 65:35. Nothing went wrong, but you are carrying more risk than you signed up for, just as markets are more expensive. Rebalancing brings the mix back. The skill lies in doing it without handing a large share of your gains to the taxman.
Why Rebalance at All
Your asset allocation, not your choice of fund, decides most of how far your portfolio can fall in a bad year. If you chose 60:40 because you could live with a 25% fall in equity, a drift to 75:25 exposes you to a bigger loss than you planned for. Rebalancing also forces a useful habit: trimming what has done well and adding to what has lagged. It is a risk-control tool first. Any extra return is a bonus, not the goal.
How Often: Calendar vs Threshold
| Method | How it works | Good for |
|---|---|---|
| Calendar | Check once a year, for example every April, and reset to target | Most investors; easy to remember |
| Threshold | Act only when an asset class drifts more than 5 percentage points from target | Investors who track their portfolio regularly |
| Combined | Review once a year, but act only if drift is above 5 points | Keeping trades and tax to a minimum |
Rebalancing every quarter rarely helps. It adds transactions, and in India each one can carry tax and exit load. An annual review with a 5-point band is enough for most people.
The Tax Catch: A Switch Is a Sale
Moving money from an equity fund to a debt fund, even within the same fund house, counts as selling the old units and buying new ones. Capital gains tax applies on the units sold.
| Fund type | Held up to 12 months | Held more than 12 months |
|---|---|---|
| Equity funds (65%+ in Indian equity) | STCG at 20% | LTCG at 12.5% on gains above ₹1.25 lakh a year |
| Debt funds bought on or after April 1, 2023 | Taxed at your slab rate | Taxed at your slab rate |
| Gold ETFs and gold funds | Slab rate | LTCG at 12.5% (after 12 months for ETFs, 24 months for fund of funds) |
On top of tax, most equity funds charge an exit load, commonly 1%, on units redeemed within a year. Our exit load guide explains how it is calculated. Mutual funds redeem on a first-in, first-out basis, so the oldest units go first, which usually helps because they are more likely to be past 12 months.
Four Ways to Rebalance Without Much Tax
- Redirect new money first. If equity is overweight, pause or reduce equity SIPs for a few months and send that money to debt or gold. No units are sold, so there is no tax or exit load. For many salaried investors this does the whole job.
- Sell only long-term equity units, and keep gains within ₹1.25 lakh. Long-term equity gains up to ₹1.25 lakh a year are tax-free, so a modest rebalance each year can often be done without paying any tax.
- Time sales with losses. Losses booked in other funds or shares can be set off against gains from rebalancing. Our capital loss set-off rules explain which losses offset which gains.
- Split a large rebalance across March and April. Selling in two financial years uses the ₹1.25 lakh exemption twice.
A Worked Example
Back to the ₹13.8 lakh portfolio at 65:35 against a 60:40 target. The target equity amount is about ₹8.28 lakh, so roughly ₹72,000 needs to move from equity to debt. If fresh SIPs of ₹25,000 a month can be sent to debt for three months, most of the gap closes without a sale. If you must sell, and the equity units are more than a year old with ₹20,000 of gain in that ₹72,000, the gain is within the ₹1.25 lakh exemption and no tax is due, provided you have not used the exemption elsewhere that year.
Mistakes to Avoid
- Rebalancing between two similar equity funds. That is fund switching, not rebalancing, and it creates tax without reducing risk. Check portfolio overlap before adding another equity fund.
- Stopping rebalancing after a crash. Buying equity when it has fallen is the hardest trade to make and the most useful one.
- Ignoring EPF, PPF and FDs. They are part of your debt allocation. Count them, or you may hold more debt than you think.
- Forgetting goals. Money needed within three years should move steadily out of equity whatever the rebalancing rule says.
The Bottom Line
Pick a target mix, review it once a year and act only when it is more than five points out of line. Use new money before selling, sell units older than a year, and keep yearly equity gains within the ₹1.25 lakh exemption where you can. Done this way, rebalancing keeps your risk where you planned it and costs very little. If you are just starting, our guide to investing ₹10,000 a month helps set the initial allocation.