# How to rebalance your mutual fund portfolio

Source: https://koshex.com/blog/how-to-rebalance-your-mutual-fund-portfolio · Published 27 April 2025 · 8 min read

Rebalancing means moving money between your investments so your split between equity and debt is back where you chose it. Markets shift that split over time without you doing anything. You can restore it with new money, an STP or a sale, and only the routes that sell units can bring tax or an exit load.

## Key takeaways

- Rebalancing brings your mix of equity, debt and other asset classes back to the split you chose after markets have moved it.
- A portfolio drifts because its parts grow at different speeds, so your risk changes without you deciding anything.
- Some investors rebalance when an asset class has moved about 5 percentage points from its target; others check once or twice a year. Neither is a SEBI or AMFI rule.
- New money needs no sale. An STP or a sale can bring tax and an exit load on the units sold.
- Rebalancing keeps risk where you set it. It does not promise a higher return.

Rebalancing means bringing your mix of investments back to the split you chose, after markets have moved it. It is not a market call. If your goal is near and you want less equity for good, that is a different decision, because it changes the target itself. [Moving from equity to debt](https://koshex.com/blog/is-it-the-right-time-to-switch-from-equity-to-debt) covers that one.

## What does rebalancing a portfolio mean?

Rebalancing means moving money between your investments so the split between equity, debt and other asset classes is back where you set it. An asset class is a kind of investment that behaves in its own way. Equity is shares of companies. Debt is loans to governments, banks or companies, such as bonds and deposits. Gold and cash in the bank are asset classes too.

How your money is split between asset classes is your asset allocation.

The split you chose is the amount of risk you chose. When the split drifts, your risk changes, and you never decided that. [How a split is reasoned out](https://koshex.com/blog/how-asset-allocation-impacts-your-portfolio), [how much risk you can carry](https://koshex.com/blog/what-is-risk-tolerance-and-why-is-it-important) and [building a long-term portfolio](https://koshex.com/blog/building-long-term-portfolio) are separate pages. This one starts after you have a split.

## Why does a portfolio drift?

A portfolio drifts because its parts grow at different speeds. Drift is the mix moving away from your chosen split because one part grew faster than another.

Here is an illustration, not a suggested mix. You hold ₹3,50,000 in equity funds and ₹1,50,000 in debt funds, ₹5,00,000 in all, so 70% and 30%. Each was bought in one go. Over some years equity rises 80% and debt rises 5%. Equity is now ₹6,30,000 and debt ₹1,57,500, a total of ₹7,87,500. Equity is 80.0% of it.

You bought nothing and sold nothing. The split changed anyway, and your portfolio now carries more equity risk than you set out to.

A fall drifts the mix the other way. If equity drops sharply, its share shrinks. Whether to sell in that situation is a separate question, covered in [what to do when markets are down](https://koshex.com/blog/should-i-redeem-my-funds-since-the-markets-are-down).

## How often should you rebalance?

How often you rebalance is your choice. Some investors rebalance when an asset class has moved about 5 percentage points from its target; others check once or twice a year. Neither is a SEBI or AMFI rule.

SEBI's investor site does list "Periodically review investment portfolio" among the habits of a smart investor.

Funds themselves must bring a passive drift outside their scheme document's allocation back within 30 business days; your own portfolio has no such deadline.

Koshex's net-worth tracking is one way to review your portfolio, and it can include investments you hold outside Koshex.

## How do you rebalance: new money, an STP or selling?

Start with money you were going to invest anyway, because it needs no sale. If that is not enough, an STP or a sale does the rest.

### Using new money

To get back to 70% without selling, your equity stays at ₹6,30,000 and the total must reach ₹9,00,000. So ₹1,12,500 goes into debt. A SIP is a fixed amount put in at regular intervals. Redirecting ₹15,000 a month to debt would take about 7½ months, ignoring any growth meanwhile.

Koshex customers can pause, cancel, change the amount of, change the date of, and step up a SIP on Koshex. Each SIP instalment is a separate purchase with its own NAV (the price of one unit of a fund) and allotment date.

Set aside emergency money before any of this.

### Using an STP

A systematic transfer plan (STP) moves money in steps. SEBI describes it as moving your investment from one scheme of a mutual fund to another scheme of the same mutual fund. You redeem in one and subscribe to the other.

For tax, each transfer is a sale in the source fund and a purchase in the target. Each one can give a gain or loss, and can carry the source fund's exit load. One fund house's scheme document sets a minimum of ₹500 and multiples of ₹1 per transfer, with at least 6 instalments. Those are that document's terms, not a rule for every fund. For how an STP works in general, see [lump sum, SIP and STP](https://koshex.com/blog/when-is-the-right-time-to-invest-in-lump-sum-and-sip).

### Selling and buying

A switch moves money between schemes of the same fund house. To move to another fund house, you sell and then buy.

For tax, a switch is a sale of the old units and a purchase of new ones. The new units' holding period starts on the switch date. [How to switch mutual fund schemes](https://koshex.com/blog/how-to-switch-mutual-fund-schemes) walks through a switch.

In the example, target equity is 70% of ₹7,87,500, which is ₹5,51,250. So you sell ₹78,750 of equity and put it in debt, which then stands at ₹2,36,250.

ELSS units are the exception. They cannot be switched out during their three-year lock-in, just as they cannot be sold. A lock-in is a period in which you cannot sell at all. For a SIP in an ELSS fund, each instalment is free only three years after its own allotment date. See [what to do once the lock-in ends](https://koshex.com/blog/your-elss-lock-in-period-is-over-whats-next).

|  | Before | After the rise | After new money | After selling |
| --- | --- | --- | --- | --- |
| Equity | ₹3,50,000 | ₹6,30,000 | ₹6,30,000 | ₹5,51,250 |
| Debt | ₹1,50,000 | ₹1,57,500 | ₹2,70,000 | ₹2,36,250 |
| Equity share | 70% | 80.0% | 70.0% | 70.0% |

## What does rebalancing cost in tax and exit load?

Only the selling routes cost anything. They can bring an exit load, if the fund charges one in its load period, and tax on the gain in the units sold. New money creates no sale, so it brings neither.

An exit load is a fee some funds charge if you sell within a set time after buying. One fund's scheme document charges 1% if units are redeemed or switched out within 3 months of allotment and nothing after. Loads differ by fund, so check the one you hold. Those documents also say the oldest units are sold first. If you built the holding through a SIP, your cost then differs from the simple split used here. See [exit load in mutual funds](https://koshex.com/blog/exit-load-in-mutual-funds).

On tax, take the ₹78,750 sold in the example. If the equity was bought in one go, ₹43,750 of that is your cost and ₹35,000 is gain. How long you held the units decides the bill. That is your holding period, from purchase to sale. An equity-oriented fund is one with at least 65% in equity shares of domestic listed companies, tested on the annual average. Securities transaction tax is charged when you buy or sell shares on an exchange, and when you sell units of an equity fund.

- **Held more than 12 months.** Units of an equity-oriented fund held more than 12 months, sold with securities transaction tax paid, give a long-term gain. Long-term gains above ₹1,25,000 in a tax year are taxed at 12.5%. With no other such gains that year, your ₹35,000 sits inside the allowance and pays no tax.
- **Held 12 months or less.** Units of an equity-oriented fund held 12 months or less, sold with securities transaction tax paid, give a short-term gain, taxed at 20%. On ₹35,000 that is ₹7,000, plus 4% cess of ₹280, so ₹7,280. Cess is an extra 4% charge on the tax. A surcharge applies only if your total income is above ₹50 lakh.

The ₹1,25,000 allowance is one for you for the whole tax year. It covers all your equity funds together, and any shares you sell too, not each fund separately.

Debt units follow another rule. A Specified Mutual Fund is one with more than 65% in debt and money market instruments. Units of one bought on or after 1 April 2023 are treated as short-term whatever the holding period, and taxed at your slab rate.

If a sale makes a loss, a short-term capital loss can be set off against short-term or long-term gains. A long-term loss can be set off only against long-term gains. Unused losses can be carried forward up to eight tax years, if you file your return by the due date. For how a SIP's instalments are taxed, read [how SIP returns are taxed](https://koshex.com/blog/how-sip-returns-are-taxed).

## Does rebalancing improve returns?

Rebalancing is about keeping risk where you set it. It does not promise a higher return. In a long rising market, selling some of the rising asset each time can leave you with less than if you had left it alone.

In a fall, rebalancing means buying more of the part that fell. Whether that helps depends on what happens next, and no one knows that in advance.

## What should you avoid when rebalancing?

Avoid rebalancing because a NAV looks high or a headline scares you. That is timing, not rebalancing. Steer clear of these too.

- **Selling units still in an exit-load period or ELSS lock-in.** The load comes off what you receive. Locked units cannot be sold.
- **Selling tiny amounts often.** Each sale can carry tax and a load.
- **Expecting a hybrid fund to rebalance your other holdings.** A hybrid fund rebalances only its own money. [Hybrid funds](https://koshex.com/mutual-funds/categories/hybrid-funds) and [dynamic asset allocation funds](https://koshex.com/mutual-funds/categories/dynamic-asset-allocation-funds) work inside their own rules.
- **Rebalancing fund by fund.** Work class by class first. Changing a fund is a separate decision; see [when to sell a mutual fund](https://koshex.com/blog/when-should-you-sell-a-mutual-fund) and [mutual fund diversification](https://koshex.com/blog/mutual-fund-diversification).

[Common behavioural biases](https://koshex.com/blog/common-behavioural-biases-investors-must-avoid) lists the mental traps that tempt investors to act on a headline.

## Frequently asked questions

### What is rebalancing in mutual funds?

Rebalancing means moving money between your investments so your split between equity and debt is back where you chose it. Markets move that split for you as one part grows faster than another. New money, an STP or a sale can restore it. Only the routes that sell units can bring tax or an exit load.

### Can I rebalance without selling or paying tax?

Yes, in part. Send new money, or a redirected SIP, to the asset class that has fallen behind, and stop adding to the one that has grown. Nothing is sold, so no gain arises. If you sell, gains on equity-oriented fund units held more than 12 months, with securities transaction tax paid, are tax-free up to ₹1,25,000 a tax year. That is one allowance for you, covering all your equity funds and shares together. Securities transaction tax is charged when you sell units of an equity fund.

### Should I rebalance when the market is down?

A fall is a drift like any other. When equity drops, its share of your mix shrinks, and bringing the split back means adding to the part that fell. The NIFTY 50 went from 12,362.30 on 14 January 2020 to 7,610.25 on 23 March 2020, down 38.4%. Rebalancing restores the split you chose; it is not a call on where the market goes next.

### Is the 5% rule a SEBI rule?

No. Some investors rebalance when an asset class has moved about 5 percentage points from its target; others check once or twice a year. Neither is a SEBI or AMFI rule. How often you rebalance is your choice.

### Can I use an STP to move money to another fund house?

No. SEBI describes an STP as moving money from one scheme of a mutual fund to another scheme of the same mutual fund. To move to a different fund house, you sell your units and then buy. The sale is taxed by the rules of the fund you sell.

### Do hybrid funds rebalance for me?

Only their own money, never your other holdings. SEBI's balanced hybrid funds hold 40 to 60% in equity and aggressive hybrid funds 65 to 80%. Dynamic asset allocation funds are managed dynamically, with no SEBI range. A fund's own trades inside it do not create tax for you.

### Should I rebalance each fund or each asset class?

Start with asset classes, which means the split between equity, debt and so on. Changing one fund for another is a separate decision, with its own tax and exit load. Once the split is right, you can review the funds inside each class.

*This article explains how things work; it is not advice to buy or sell any investment. Mutual fund investments are subject to market risks, read all scheme related documents carefully.*