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market | IST

Explained: What are Smallcases, the new investing game in town

Smallcase offers you a degree of control, you can accept or reject a change recommended by the smallcase manager. Moreover, the churn in the portfolio is transparent, since you can approve or reject each change.

Smallcases are a curated theme-based portfolios, developed by Smallcase Technologies, a fintech company launched in 2016 by three IIT Kharagpur graduates. It allows investors to park their funds according to their conviction and lately they have become the talk of the town.
The platform enables one-click investment in a basket or portfolio of stocks and ETFs in a specified weightage to reflect certain themes or strategies called ‘smallcases’. Usually, these portfolios are created by a team of analysts and have small ticket sizes, making it prominent among retail investors. So when someone says they have bought a smallcase, it means they have bought a certain basket of stocks offered on the platform.
Some themes/strategies investors may go for while buying a smallcase is ‘digital businesses’, or ‘momentum stocks'’ or 'value stocks' or ‘stocks tied to rural demand', etc.
How many baskets/smallcases are there? Who offers them?
As of now, 250 basket of stocks exist, and 120 of them are managed by SEBI-registered smallcase managers. In fact, anyone registered with SEBI can offer a basket of stocks on the Smallcase platform.
The most popular smallcase portfolio managers are Windmill Capital, a subsidiary of the platform smallcase. There is also a Weekend Investing run by Alok Jain, Capitalmind run by Deepak Shenoy, and so on.
How to buy a smallcase basket?
You need to contact one of the 12 brokers who have tied up with smallcase. Through them, you should be able to view the smallcases on offer and decide which one to buy.
An important thing feature of a smallcase basket is control. When the smallcase portfolio is rebalanced or updated by its manager, you have the option to apply the change or skip it. You can also make changes to the update before applying it. So, you are in control of your portfolio.
What is the cost of owning a smallcase basket?
As an investor you have to pay a research fee to the smallcase manager. It could either be fixed or percentage-based. Meanwhile, the smallcase makes money by taking a cut from the smallcase manager.
What are the pros and cons of owning a smallcase basket?
Smallcase offers you a degree of control, you can accept or reject a change recommended by the smallcase manager. Moreover, the churn in the portfolio is transparent, since you can approve or reject each change.
One issue, however, is do the smallcase managers have the research bandwidth and prowess of a traditional money management set-up? Second, you will have to pay higher taxes. Because every time you sell a stock, you pay short-term capital gains tax, unlike in a mutual fund set up (you pay when you redeem your units). So, the overall tax burden in this structure would be much higher. Third, there is concentration risks of a particular strategy or theme or sector. And lastly, it is still a relatively new way of going about investing and it has only seen a bull market. Its true test will be when the cycle turns and things get ugly.
For now, smallcases continue to attract investors and flows. This traction is led by a bunch of factors such as the lacklustre performance of mutual funds and the itch to do-it-yourself. And of course, the overall explosion in younger people participating in the markets.
To discuss this new investing game in detail, CNBC-TV18 spoke with Vasanth Kamath, Founder & CEO, Smallcase and Alok Jain, Founder, weekendinvesting.com.
Kamath saw a lot of investors wanting to go do-it-youself (DIY) for building their portfolio. “They were opening Demat accounts and the entire process of building portfolio was left to them. So, we felt a product like this where you have a professional manager, the diversification and yet have the transparency and control you would have with stocks. The idea made a lot of sense in this construct,” he said.
It is a new behaviour and a lot of users are coming to the platform, he added.
Speaking about the most popular smallcases, he said asset allocation ones remain popular. For example, the all-weather smallcase is not just equity, it has equity, gold and fixed income to it.
The more recent smallcases launched provide exposure to global equities and fixed income instruments in different formats. “This would be our core focus for the business going ahead, where we could add more asset classes and instruments, so that it is not just an equity investing platform,” Kamath added.
Jain said it is a win-win situation for everyone because this new ecosystem has enabled people to curate nimble strategies. “In the crisis we saw in March 2020, even in 2018, when smallcaps were crashing, we were able to see that our portfolios were able to outperform even when the markets were going down,” said Jain, adding that when your portfolio starts to outperform when the market is down as well as up makes a magical performance matrix.
For the entire discussion, watch video.