Musings with Analyst | March 2025

On a daily basis, we receive multiple queries from our investors on rebalance. Though the quantum of questions are high, at the end of the day, all those questions circle back to a few common doubts. So we thought let’s make it easier for both you all and for us. Hence, we have collated all the common questions that we receive around rebalance and answer it over here. Let’s begin, shall we? 

1. What is rebalance? Why must a smallcase be rebalanced?

Rebalancing is the process of periodically reviewing and adjusting the stocks or ETFs within a smallcase to ensure it remains aligned with its intended theme or strategy. This involves adding or removing stocks/ETFs and modifying their weights based on model factors. Regular rebalancing is crucial for a smallcase to adapt to changing market conditions and maintain its relevance to the original investment idea. By applying rebalance updates, investors help keep their portfolios aligned with the smallcase’s strategy, which can be essential for achieving the desired investment outcomes. ​Neglecting to apply rebalance updates may cause a smallcase to deviate from its intended strategy, potentially impacting returns and increasing exposure to unintended risks.

2. What happens to investments when a rebalance update is applied?

Applying a rebalance update to your smallcase involves adjusting your investment portfolio to align with the updated strategy or theme. This process typically includes selling certain stocks and purchasing new ones, which can lead to changes in your investment metrics. Here’s how your investments are affected:​

i) Changes in Current Investment: When stocks are bought and sold during rebalancing, depending on the final value, current investments change. If the buy value is more than sell value, current investments will increase. If the buy value is less than sell value, current investments will decrease. And if the buy value is near to the sell value, then the current investments stay flat.  

ii) Realized Returns: The profit or loss from selling stocks during rebalancing is reflected in your realized returns. For example, if you sell shares of a stock at a higher price than the purchase price, the gain is added to your realized returns. Conversely, selling at a lower price results in a loss.

iii) Money Put In: This metric represents the total amount you’ve invested in the smallcase. If the total buy amount during rebalancing exceeds the sell amount, the difference is added to your Money Put In, indicating additional funds invested. If the sell amount is greater, the excess funds are credited back to your broker account, without affecting the Money Put In.

Let’s understand this with the help of an example. Refer to the screenshot above. It represents the Current Investment, Realized Returns, and Money Put In pre and post rebalance. The section highlighted in red represents the values post rebalance. If you notice the Current Value, Realized Returns, and Money Put In has increased between pre and post rebalance. 

What does this mean? This means during the rebalance the buy value was higher than the sell value. Hence, Money Put In increased. Also, Current Investment & Realized Returns rose because the stocks were exited at profits.

It’s important to note that during rebalancing, sell orders are executed first, and the proceeds are used to fulfill buy orders. If the proceeds from selling are insufficient for the new purchases, additional funds are debited from your broker account. 

3. Why are my investments less after rebalance? 

After applying a rebalance, you might observe a decrease in your Current Investment. This occurs because during rebalancing, certain stocks are sold, and the investment previously allocated to these stocks is removed from your Current Investment. ​

The profit or loss from these transactions is recorded in your Realized Returns. For instance, if you initially invested ₹10,000 in Stock A and later sold it for ₹11,000, your Realized Returns would show a profit of ₹1,000. Conversely, selling it for ₹8,000 would reflect a loss of ₹2,000. In both scenarios, the ₹10,000 is deducted from your Current Investment but remains accounted for in your Money Put In, representing the total amount you’ve invested so far. 

It’s important to note that during rebalancing, sell orders are executed first, and the proceeds are used to fulfill buy orders. If the proceeds from selling exceed the amount needed for new purchases, the surplus is credited back to your broker account. If additional funds are required beyond the sell proceeds, they are debited from your broker account and added to your Money Put In. 

Therefore, a decrease in Current Investment after rebalancing is a normal outcome of adjusting your portfolio to align with the updated strategy. Your total invested amount is still reflected in Money Put In, and any gains or losses from these adjustments are captured in Realized Returns.

4. Why are rebalance updates not applied automatically?

The current market infrastructure does not allow auto application of rebalance updates. When you decide to take services of a Research Analyst, it can only provide you the recommendations on single stocks, model portfolios etc. but can never do automatic portfolio rebalancing, as the investing approach is more on the DIY side. This means, the investor is in the driving seat. The point to note is that the RA entity does not hold client funds directly and hence they cannot automatically rebalance client portfolios unlike collective investment vehicles like Mutual Fund, Portfolio Management Services (PMS) where the manager manages clients funds directly and has the authority to rebalance client portfolios.  

5. What happens if I miss a rebalance update? And what happens if I apply the next rebalance after I miss/skip one?

​If you miss a rebalance update for your smallcase, the update remains available for you to apply until the next rebalance is issued or until you choose to skip it. It’s important to note that rebalancing is not automatic; you will receive notifications via email, push, or in-app alerts when an update is available. Applying these updates ensures your smallcase stays aligned with its intended strategy. If you skip or miss an update, your smallcase’s composition and returns may diverge from the original strategy. If you miss a rebalance and apply the subsequent one, your smallcase will be updated according to the latest recommendations. However, this approach might not yield the same returns as consistently applying each update. Regularly applying rebalance updates is recommended to keep your investments on track with your financial goals.

6. Why was the smallcase not rebalanced when stock prices were falling? If a stock underperforms, please initiate an immediate rebalance instead of waiting for the next scheduled update.

It’s important to understand the rationale behind smallcase rebalancing. Rebalancing is done, in order to keep the constituents of a smallcase aligned with the theme/strategy and not necessarily to catalyze the performance of the smallcase. In other words, rebalancing is not a magic wand, which would turn around the fortunes of a smallcase, as soon as it’s applied. That being said, there have been occasions when we have restored to an ad-hoc rebalance as one of the constituent(s) might be facing severe issues and might need urgent attention. For example, in ad-hoc rebalances we have removed Delta Corp from one of our smallcases as the company had received an exorbitant GST demand notice or Paytm when RBI had levied restrictions on their most important business vertical.  

7. Why was I advised to exit stocks that were still increasing in price?

As mentioned earlier, rebalancing is not done from the perspective of prices and returns. When the team applies a rebalance, we do not optimize for either prices or returns. We optimize for one thing, which is alignment of underlying constituents with the smallcase theme or strategy, as we believe this disciplined approach of investing will automatically yield results in the long term  Hence, there would be situations where we would drop a rising stock or add a falling stock or drop a falling stock or any other combination. For instance, let’s consider a portfolio based on the strategy to select stocks which are in the top 25% in the 3 months price performance. Now even if a stock which was selected earlier based on this criteria has risen over the last 1 month, it can still be excluded from the portfolio if it’s not there in the top 25% in the 3 months window. Hence a rising stock could still be removed in a rebalance, due to strategy logic.

8. Why did the smallcase performance not improve in spite of rebalance? The smallcase has not been performing well, in spite of that you have not changed the portfolio allocation.

Rebalancing is not a magic wand and hence it’s likely that after rebalance the smallcase performance has not picked up meaningfully. Investors need to understand that rebalancing a portfolio doesn’t necessarily mean that the portfolio will suddenly start outperforming. If just by rebalancing a smallcase, outperformance could have been guaranteed, then life would be very easy. An important point to understand here is that rebalance is a process to weed out stocks not satisfying the theme or strategy and include ones which are more relevant to the theme or satisfy the model criteria being followed by the strategy. This ensures a disciplined approach of managing a portfolio and risk and sticking to the rules initially envisaged and tested during the time of the portfolio launch. This is the time when the team performs a rigorous analysis of the new strategy or idea and analyzes the performance through various lenses. Only once convinced, is when the strategy is launched in a model portfolio framework for the retail investors to invest in.

9. I am a paid subscriber, why is my smallcase not rebalanced more frequently?

At the launch of every smallcase, depending on what the needs of that particular basket are, a rebalancing frequency is determined. Like mentioned above, if a smallcase is based on short term factors, then it goes without saying that the rebalancing frequency would also be relatively shorter than a smallcase that uses long term factors. We do not encourage unnecessary rebalancing as it increases the associated costs for our investors. 

Disclaimer: Investment in securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of a SEBI recognized supervisory body (if any) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

The content in these posts/articles is for informational and educational purposes only and should not be construed as professional financial advice and nor to be construed as an offer to buy /sell or the solicitation of an offer to buy/sell any security or financial products.Users must make their own investment decisions based on their specific investment objective and financial position and using such independent advisors as they believe necessary. Windmill Capital Team: Windmill 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.