What Is Rebalancing in Smallcase?

When you plan to visit a cold city, you pack in woolen clothes to ensure your safety. Similarly, you change gears when you are looking to accelerate your vehicle’s speed.

What we mean to say is we tend to adjust automatically to ensure we are best prepared for the upcoming changes.

Similarly, when there is a portfolio update in smallcase, a rebalancing update is sent to the users to ensure they are prepared for what lies ahead.

This article discusses rebalancing and its impact on your portfolio profits.

What is rebalancing?

Smallcase rebalance is the process of periodically reviewing and making meaningful changes to your portfolio to ensure it continues to adhere to the original idea.

The user has the option to go through the suggested changes and can accept or reject the update. But skipping the update can lead to your smallcase no longer following the original idea. As a result, it can impact your returns, and we suggest you understand the financial repercussions before making a move.

How does smallcase rebalance work?

As you know, a smallcase is a basket of stocks that adhere to a specific market strategy/theme/idea. Each smallcase has a volatility factor to it. For example, if you choose a low volatility factor-based smallcase, it means that you are investing in instruments that do not change significantly over time. Portfolio updates in such smallcases usually take place once every six months.

But if you are investing in medium or high volatility smallcases, these contain highly volatile instruments and may require a periodic assessment to understand their future profitability. Portfolio updates in such smallcases occur once every three months in the usual scenario. It ensures that the smallcase is the right choice for taking exposure to a particular theme.

For example, you are playing a cricket tournament to win it. The first match you play is on a sluggish pitch with long boundaries. You will automatically pack in more spinners in your team to cater to the conditions. But the next match is on a greener pitch, where the last match’s team may not perform as well. So you will have to replace some of your spinners and pile in more pace options. It is the simplest example of rebalancing.

Similarly, suppose a stock/instrument is no longer a match for the model criteria. In that case, the smallcase manager can either obliterate it or reduce its ratio in the portfolio. It ensures that the theme of the smallcase remains the same and all the items in it are in line with the customer’s expectations.

Does stock rebalancing impact your profits?

For example, you got a notification stating a rebalance update for your Smallcase portfolio. You click on the notification and log in to the platform. You will see that the smallcase manager has sent an update where they are reducing or eliminating the ratio of a particular investment instrument and replacing it with another.

So when you accept smallcase rebalance, smallcase automatically tries to move the weighing scheme as close to the prescribed weighing scheme, and stocks that got removed/weighed down are sold, and new instruments are added. It is done to minimize the rebalancing cost.

Depending on the current market price, you either sell these instruments at profit or loss. The amount of the same is added to your Current Value of the rebalanced portfolio. Such a figure doesn’t impact the Current Returns tab, which showcases the current profits or losses made via the smallcase.

Wrap up

Smallcase rebalance updates are optional for every user. You can review the changes and apply or reject them in two easy clicks. It is imperative to understand that when you are investing in a smallcase , you are trusting the fund manager to utilize your money in the best possible manner. So denying a portfolio update in smallcase would mean that you no longer trust their judgment.
At Teji Mandi, we are a SEBI registered Investment advisor dedicated to helping you make the best investment choices. Click here to invest in smallcases by Teji Mandi, specially curated for your needs.