What happens if you skip a smallcase rebalance?

Rebalancing season is here; many of our fee-based and free smallcases were recently updated. If you haven’t applied the changes yet, now’s the time.

Rebalancing keeps your smallcase aligned with its strategy. Skip it, and both the stock mix and your returns can drift from the intended path.

It isn’t just a routine exercise; market movements tilt weights, and without timely rebalancing, the risk-return profile changes. By reviewing and realigning holdings, we ensure each smallcase continues to reflect its original idea and framework. To illustrate why this matters, I’ve broken down what really happens when a rebalance is skipped.

Meet Rekha (a fictitious character), who invested ₹28,573 on 3rd Jan 2025 in an equal-weighted smallcase A with 8 stocks. When the smallcase was rebalanced on 16th March 2025, here’s what her portfolio looked like before applying the update:

When rebalancing a smallcase, either one or both of the below can happen:

• Stocks which got removed from the smallcase are sold, and stocks which got added are bought
• The weights of stocks might be changed to ensure it is close to the prescribed weighting scheme

The following changes were recommended during the rebalance:

• Orient Cement and KEI Industries were dropped
• FDC Ltd, KPR Mill and Jamna Auto Industries were added

The table illustrates the amount of money expended and earned after applying the rebalance update. Let us attempt to understand the constituents of the table using data in rows 2 and 5.

Realised investment refers to the amount of money invested in the stock when Rekha bought the smallcase in January 2025 and has now been sold. It is calculated as the no. of shares sold * average buying price. The average buying price of Orient Cement was Rs. 163.40, so 22 * 163.4 = 3595. 

Amount invested refers to new funds pumped into the smallcase to buy the newly added stocks. It is also calculated as no. of shares * avg buying price, i.e 3 *  1004 = 3013 for KPR MIll. This is the amount of outflow from Rekha’s trading account.

The amount sold is calculated as the no. of shares sold * average selling price. The average selling price of Orient Cement is Rs. 143.70, so 22 * 143.70 = 3161.           

Realised P&L is calculated as the difference between the Amount sold and realised investment. A positive number indicates profit, and a loss is represented by a negative number. Since the average buying price of Orient Cement is higher than the average selling price, Rekha incurred a loss of Rs. 433.

Let us now study the new investment details:

Let us also consider an alternate scenario where the returns were positive. So prior to rebalancing, the total return percentage would have been 6.2% (1784 / 28,573) * 100. While after rebalance, the total return percentage drops to 5.4% (1784 / 32850) * 100. This is because more money was invested in the smallcase, leading to a jump in money put in.  Actions like buying more of a smallcase or partially exiting the smallcase also impact profitability. Read more about it here.

In conclusion, skipping a rebalance update can lead to your smallcase drifting away from its intended strategy, potentially affecting both the composition and returns. By staying on top of rebalances, you ensure that your investments remain aligned with the original vision, helping you achieve your financial goals more effectively. Always remember, a timely rebalance keeps your portfolio on track.

Answering Frequently Asked Questions about Rebalancing

What is Rebalancing?

Rebalancing a smallcase is the process of reviewing its stocks/ETFs & their weights to ensure that it remains true to the underlying theme or strategy. Rebalancing is done considering fundamental factors like company earnings, stock price fluctuations, etc and narrowing down on the right set of stocks.

Rebalancing is done by the smallcase manager after thorough analysis and research. The frequency of rebalance varies with every smallcase.

When you apply a Rebalance Update:

– Stocks/ETFs which were removed from the smallcase, are sold

– Stocks/ETFs which got added, are bought

– The weighting scheme of constituents is moved as close as possible to the prescribed weighting scheme of the original smallcase

In some cases, where the manager thinks that the smallcase still sticks to it original theme, it is also possible that no changes are done during a rebalance.

Are rebalance updates applied automatically?
Rebalance updates are not applied automatically. You would be notified via email, push notification or in-app notification when an invested smallcase has a rebalance update available. You can review the changes and apply the update in 2 clicks.
In case, you miss an update, it will be available for you to apply it until the next rebalance update is sent or until you click on skip.

What happens if I apply the next rebalance after I miss/skip one?
When you skip an update but apply the next one, your smallcase is updated according to the most recent rebalance recommendation from the manager. It is like skipping a software update on your phone but installing the latest update. However, the returns & CAGR might not be the same as the original smallcase.

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_{Windmill Capital TeamWindmill Capital Private Limited is a SEBI registered research analyst (Regn. No. INH200007645) based in Bengaluru at No 51 Le Parc Richmonde, Richmond Road, Shanthala Nagar, Bangalore, Karnataka – 560025 creating Thematic & Quantamental curated stock/ETF portfolios. Data analysis is the heart and soul behind our portfolio construction & with 50+ offerings, we have something for everyone. CIN of the company is U74999KA2020PTC132398. For more information and disclosures, visit our disclosures page here.}