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What is Rebalancing in smallcase?

Updated: Jul 26, 2022

What is it?

Smallcases are rebalanced on a regular basis by their creators. This entails changing stocks/ETFs and their weights to ensure that the underlying investment thesis is maintained.

Rebalancing is carried out by taking into account fundamental factors such as company earnings, stock price fluctuations, and so on, and focusing on the appropriate stocks. The smallcase manager rebalances the portfolio after careful consideration and research. The frequency of rebalancing is at the smallcase managers discretion.

If you have invested in a smallcase, the manager will usually send you quarterly rebalance updates. All of this makes sure that the smallcase keeps reflecting the initial idea.

Why do we need it?

A stock portfolio must adapt to both internal and external changes, which can range from a shift in company fundamentals to macroeconomic trends. Smallcase rebalancing follows the same logic. When a smallcase is rebalanced, the stock that no longer meets the strategy criteria is removed. The smallcase is expanded to include any new stocks that meet the requirements, but its overarching idea would continue to stay the same.

How does it impact my portfolio?

When applying a Rebalance Update:

  • Stocks and ETFs are sold after being removed from the smallcase

  • Stocks/ETFs that have been added are purchased.

  • The weighting of the constituents is adjusted to be as reasonably close to the recommended weighting of the original smallcase.

The prices at which you complete the trade for stocks/ETFs in the rebalance will vary a bit from the prices used to determine the returns on the manager's smallcase. This may cause a discrepancy between the returns generated by you and the original smallcase.

Slippage will occur due to the timing of the rebalancing. So always rebalance your portfolios as soon as possible to minimize slippage.

How do they actually work?

Rebalancing updates are not carried out automatically. When a rebalance update is available for an invested smallcase, you will be notified via email, push notification, or in-app notification. In just two clicks, you can review the changes and apply the update.

If you happen to miss an update, you'll be able to apply it until the next rebalance update or until you choose to skip it.

Rebalancing Procedure:

  • On your Investments page, where available, click "Rebalance."

  • Go through the update and "Customize" to make changes

  • Approve the update to review and place order

To rebalance or not to rebalance?

Occasionally, when the manager feels that the smallcase still adheres to its original theme, it is also possible that no changes are made during a rebalance.

Your smallcase is updated in accordance with the most recent rebalance suggestion made by the manager when you miss one update but apply the succeeding one. It's the same as skipping a software update on your phone but installing the most recent one. However, the returns and CAGR may differ from the original.

It's advised to rebalance in order to update your smallcase. It allows you to stay true to the smallcase's investment thesis. It also ensures returns that are close to the smallcase's CAGR, and useful in shielding you from the market's volatility.

Rupeeting rebalances

Rupeeting smallcases are rebalanced quarterly. The research team reviews every smallcase once a quarter to add or remove stock/ETFs as needed.

The Rupeeting team conducts extensive research and takes a top-down approach based on the EIC (Economy-Industry-Company) model. We begin with a portfolio that is equally weighted. However, the weightage changes over time based on the underlying stock price movement.

We start with an equal-weighted portfolio. However, over time, the weightage undergoes change based on the underlying stock price movement. However, we have a portfolio strategy in place that requires a change in weight when a specific stock exceeds our set limits.

We may relax these limits based on past performance, potential future outperformance, or other risk-reward parameters. We rely on the research team's expertise and experience to determine the weights of the underlying stocks.

Head over to our collection of Rupeeting's smallcases and choose from a wide range of strategies that make you money!

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