Smallcase managers giving big returns to equity investors

Smallcases may not be giving mutual funds a run for their money just yet, but their outperformance sure has caught the attention of investors. “We have seen over 4,000 subscribers and at present, we have over 1000 active subscribers,” says Sonam Srivastava, Founder & CEO of Wright Research. “Most of our active subscribers are in the 28 to 35 years age bracket,” she said. While most investors so far are from the metropolitan cities, Wright Research is witnessing emerging interest from investors in cities like Lucknow, Indore and smaller pockets of Gujarat too.

Wright Research is just one from the hundreds of smallcase managers that are offering thematic and sharp focused baskets of stocks to investors. Each basket of stocks can range from 2 to 50 and the only pre-requisite for an investor is to have a demat account with a broker like Zerodha, Motilal Oswal, Axis Direct among others.

The research house is managing 10 smallcases at present – ranging from an ETF-based smallcase starting as low as Rs 6,000 minimum investment to a Balanced – Multi Factor Tactical smallcase that requires an investment of Rs 134,442. That latter being a low volatility smallcase with a CAGR of 43.40%.

“We follow momentum investing as a principle where we pick stocks when they are on their way up and we sell them once prices are likely to fall. We look for breakout signals and rebalance the smallcase portfolio on a monthly basis,” Srivastava described. “Using this strategy, we have been able to give up to 60% return to investors and record a CAGR of 30%,” she added.

Asked if such smallcases were expensive to own and operate, Srivastava said that an average ticket size of one lakh rupees invested for three to five years would fetch an investor handsome returns while tiding over short-term volatility. “We charge Rs 1,000 for six months and return 20% to 30% profit to investors, so our fee is not large at all,” she said. Smallcase platform charges a one-time fee of Rs 100. In some cases, however, the fee is not fixed but a percentage of up to 2.5% of the invested amount. So an investment of Rs 1 lakh would cost an invested Rs 2500 over the year. This fee is the revenue for managers like Wright Research.

Another smallcase manager Alok Jain, CEO or Weekend Investing and a SEBI-registered investment advisor is equally bullish on smallcases. He manages seven momentum-based portfolios on smallcase.

Of these seven, the ‘Mi ATH’ has been the most popular smallcase due its nimble performance, says Jain. “Over last five years, it has clocked a CAGR of above 50% and in FY2021 it closed the year at +180.6%,” he told Money9.

Due to this stellar performance, there was a large queue of investors that could not be serviced by Weekend Investing. “The popularity has been such that we had to close subscription to it to avoid getting overcrowded,” he said.

Another one of Jain’s portfolios – the Nifty Next 50 – 10 (NNF10) is a basket that has constantly outperformed Nifty 50 and the Nifty Next 50 indices.

This smallcase comprises just 10 stocks from the Nifty Next 50 index that Weekend Investing assigns equal weightage to and rebalances every month, giving investors maximum return from the momentum investing principle. “The monthly rebalance re looks at the NNF Index of 50 stocks and re determines which are the top 10 for the next month… so one or two stocks will normally change every month and this is the selection of the fittest shuffle that creates the alpha.”

In his blog on Weekend Investing, Jain describes this as Darwin’s theory of evolution – survival of the fittest! Jain believes, investors (unlike species) need not always be the strongest or fittest to survive – but the most disciplined. “If investors can follow a plan which takes care of risk management and has a strategy that has a positive expectation, there is no reason why anybody cannot make good returns provided he or she is willing to stay with the plan,” he said.