Portfolio Rebalancing Backtester

How this works

The return assumptions used elsewhere on this site (12% equity, 7% debt, 6% inflation) are documented on the assumptions behind these defaults. This backtester uses actual historical Sensex and gold data instead, not those fixed assumptions.

Meera rebalances, and pays for it

Meera, 38, works at a logistics firm in Chennai and runs a 70:20:10 equity/debt/gold portfolio worth ₹42,00,000. Nifty had a strong year, up 22%, while her debt and gold holdings barely moved. By the time she checks her allocation in March, equity has drifted to roughly 76% of the portfolio and debt and gold have shrunk to about 16% and 8%.

To rebalance back to 70:20:10 she needs to sell about ₹2,52,000 of equity mutual fund units and split the proceeds into debt and gold. That sale triggers LTCG. If the units sold had a long-term gain of, say, ₹1,80,000 attributable to that block, and she's already used up her ₹1,25,000 annual exemption elsewhere, roughly ₹55,000 of that gain gets taxed at 12.5%, a bill of about ₹6,875. If any of the units were held under a year, the short-term slab of 20% would apply instead, and the bill nearly triples.

None of that shows up in this backtester's CAGR or drawdown numbers. The tool assumes frictionless rebalancing: sell here, buy there, no leakage. Meera's real portfolio doesn't work that way, and the gap between the backtested number and her lived return is exactly the tax and any exit load she paid to get there.

Reading the CAGR and drawdown pair correctly

This tool gives you two numbers side by side on purpose. CAGR alone tells you nothing about how rough the ride was to get there, and drawdown alone tells you nothing about whether the risk was worth taking. A 90:10 equity-heavy mix will usually post a higher CAGR than a 50:50 mix over 45 years. It will also post a much deeper drawdown in years like 2008. Whether that trade is worth it depends entirely on what you were doing with the money in that particular year, not on which number is bigger.

If you're ten years from retirement, a deep drawdown is a paper loss you can wait out. If you're two years from retirement, the same drawdown is a real cut to your corpus right when you can least afford sequence-of-returns risk. The backtester shows you what happened historically. It can't tell you which year of your own life you're standing in.

What trips people up

People assume more frequent rebalancing is automatically better, because tighter control of drift sounds safer. In practice, rebalancing every quarter instead of every year mostly just increases the number of taxable events and exit-load triggers without improving the risk profile much. Annual rebalancing captures most of the benefit. Monthly rebalancing mostly captures fees.

People also forget that gold and debt funds carry their own tax rules, and they're not identical to equity. Debt mutual funds bought after April 2023 are taxed at your slab rate regardless of holding period, no indexation, no LTCG concession. So a rebalancing trade that moves money out of equity into debt can trigger equity LTCG on the way out and then park the proceeds in an asset with a worse tax treatment going forward. It's a real cost that a CAGR chart will never show you.

And a smaller one: people rebalance based on the calendar rather than based on drift. If your target is 70:20:10 and a year passes with equity moving to 71%, there's no real reason to sell anything. Rebalancing bands, only acting once an asset drifts more than 5 percentage points from target, cut down on unnecessary trades compared to a rigid annual reset, though this tool models fixed-frequency rebalancing, not band-based rebalancing.

Where the backtest stops being reality

Past Sensex and gold behaviour is not a promise about the next 45 years. India in 1980 was a closed, heavily regulated economy nothing like today's, and the market structure, liquidity, and the sheer number of participants have all changed enough that treating the full historical series as one continuous, comparable regime is itself a simplification.

The debt leg here is proxied by the RBI repo rate, which is a reasonable stand-in for a short-duration debt fund but not identical to what any specific fund actually delivered, net of expense ratio, credit risk, and fund manager decisions. And as covered above, this backtest carries no tax drag and no exit load, which means every number you see here is a best case relative to what you'd actually keep after trading costs. Treat the output as a way to compare allocations against each other, not as a forecast of your own future portfolio value.