Buy top 100 stocks in 150 rupees – the curious case of ‘smallcase’ investing

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A new phenomenon of investing in stocks is emerging allowing retail investors to buy customised buckets of thematic or diversified stocks through smallcases. Smallcases are typically 12 to 15 stocks bucketed together to create a portfolio for an investor looking at deriving long-term returns on stock-based investments.

Smallcases are not mutual funds

Like mutual funds, smallcases could be thematic or diversified stocks pooled together. Like Equity Traded Funds (ETF), these could be index stocks bunched in a smallcase. But unlike mutual funds or ETFs, in the case of smallcases, the investor is a ‘shareholder’ and not a ‘unitholder.’ This means, the investor gets individual stocks comprising the ‘smallcase’ right in his demat account.

“Similar to mutual funds or ETF or Portfolio Management Services (PMS), smallcases are portfolio wrappers on top of stocks. In the case of smallcases, these are baskets of stocks or ETFs that are created and managed by SEBI-registered professionals,” said Vasanth Kamath, Founder & CEO of smallcase – a Bengaluru-based fintech startup that creates such smallcase funds.

“The difference between smallcase and other investment products is that investors hold the underlying stocks in their Demat accounts. They have complete transparency and customisability. They can tweak the composition of the stocks,” he said.

By customisability, Kamath implies that with smallcases, if an investor likes a certain stock in a category, he could increase his exposure to that particular stock. Similarly, the investor may choose to drop a stock from his bucket if he chooses to. “You have complete transparency and flexibility in your portfolio,” Kamath added. This flexibility is not available on Mutual Funds because a fund manager, not the investor, manages the fund.

How to invest through smallcases?

Just like trading in direct stocks, smallcases are traded through the exchanges. A trading account and Demat account are required where the trading account helps an investor buy and sell stocks. Demat account, on the other hand, is where the investor gets to hold these stocks. At present, twelve brokers including Zerodha, Upstox, and Angel Broking offer smallcase investing.

Once invested, every stock comprising the smallcase basket gets credited to the investor’s Demat account and can be individually traded too.

This helps those investors who prefer buying select stocks at a regular frequency. It helps equity investors as a value addition over direct stock buying.

Investors also have to option of creating SIPs in the chosen smallcase.

How liquid are smallcases?

Smallcases follow the same behaviour as direct stocks. There is no lock-in period and the smallcase as liquid as the constituents within it. Most investors right now use it as a long-term investment tool. They buy and hold their basket of stocks.

Are smallcases investments expensive?

Smallcases come at the same cost as direct stocks – the brokerage fee. The only addition is that in some smallcases, there is also a research fee added. This fee could be a fixed annual flat fee or a percentage of the investment. “The research fee depends on the particular smallcase manager and on the kind of stock exposure. It can range between five to ten thousand rupees fixed per year or a percentage between 1% to 2% on investment amount,” Kamath said.

Who should go for it?

Smallcases give customisability as compared to direct stocks or mutual funds. For investors who are more evolved and go for direct stock buys, it helps build a portfolio with diversification. “Smallcase helps with creating an equity portfolio and a differentiated portfolio. It can have anything between two to fifty constituents. On and average, between 12 to 15 stocks are held in each smallcase,” Kamath said.

Any minimum ticket size?

Kamath said an investor could start with as little as 150 rupees through the smallcase ETF portfolio that offers two indices – the Nifty 50 and the Nifty Next 50. “We give the top 100 stocks. It is the index way of investing and investors can invest any amount they like,” he said. “People who go for 150 rupees are the ones who just opened their demat accounts to understand how this construct works,” Kamath added.

Do experts concur?

According to Amit Kumar Gupta, Portfolio Manager, Adroit PMS, “Smallcases as a concept is good only fir well-informed investors. Equity penetration in India is still very low and the common man doesn’t participate in broad conservative products like Mutual Funds fully.”

Gupta feels smallcase as a concept is a little ahead of its time, but if an investor has the confidence in a SEBI-registered advisor or research analyst, then may consider investing in smallcases.

“Since smallcase does not have their own advisors, due diligence needs to be done by investors before putting money into them,” he said.