Investing and Smallcase

Many of us in this lockdown have at least thought or studied or invested in stock market. For the beginners it is really tough to analyse and study. Mostly, we tried to join a random group or to get suggestions on which stock to invest and how much to invest in those stocks. Some of us blindly followed these random suggestions and trusted others.

In this randomness I tend to found out an App named Smallcases.

To simplify Smallcases are a new way to invest in stocks. A smallcase is basically an intelligently weighted basket of upto 50 stocks that reflects a theme, idea or strategy.

If you are investing in smallcases, you get the direct ownership of the individual stocks bundled together in a portfolio. This is different from mutual funds, where you don’t have ownership rights in the stocks that form your mutual fund portfolio but you hold units of the portfolio.

Smallcases are centred around a trending market theme probably rising rural demand or a financial model like zero debt or different risk profiles viz. aggressive, balanced and conservative (they also explain which type of variants will likely suit you or which type of investment will be better).

Smallcases, the stock selection for a theme is a result of well documented research processes and it's ensured that the selected stocks aptly represent the particular theme. If an investor spots a particular trend and believes that the trend will last long enough to make a significant difference in terms of capital gains, then he/she can invest in such themes by using Small case’s tailor-made portfolios. Investors can customize their Smallcase portfolios if they wish to. Stocks can be added and removed.

Smallcases aren't a means of recommending or advising investors. Choosing a smallcase is upto each individual. Mostly, provide you exposure to trending market themes (GST, smart cities) & investing styles & strategies (Buffett, Graham, Greenblatt).

A brokerage account is mandatory to trade in smallcases.  Since you will be investing in stocks directly, a trading account and a Demat account is required. Smallcase Technologies has partnered with brokerages such as Zerodha, HDFC securities, Kotak Securities, Axisdirect, Edelweiss, 5paisa and Alice Blue.

When you invest in smallcase, money is debited from your trading account and stocks are credited to your Demat account.

Smallcase does not charge any fee individually for its portfolio. The fee is charged by Smallcase’s brokerage partner.

All its partners, namely Zerodha, HDFC Securities, Axis Direct, Edelweiss, and 5paisa, charge Rs.100 as the fee for the first transaction on a particular Smallcase portfolio.

Once the investor has paid the Rs.100 fee after selecting a certain Smallcase portfolio, then no subsequent fee is charged for further investments made in that particular portfolio.

For example, let us assume that an investor starts with an Rs.10,000 investment in the “Smart Cities” Smallcase.

During this first Rs.10,000 transaction, a fee of Rs.100 will be charged. This Rs.100 is irrespective of the investment amount.The initial investment amount can be Rs.10,000 or Rs.50,000. The fee will remain Rs.100 for that first transaction.

Subsequently, if the investor invests another Rs.1 lakh, then there will be no Smallcase fee. Only brokerage and other charges, as charged by the broker, will be applicable.If that same investor also invests in another Smallcase portfolio, like “Smart Beta”, then another Rs.100 will be charged for the very first investment made in “Smart Beta”.Then, subsequent investments in “Smart Beta” or “Smart Cities” will not attract any Smallcase fee. All investment transactions, however, will attract brokerage-related charges.

If you are having a thought how it is different from Mutual Funds? 

So let me tell you this when you buy from smallcase you become a direct shareholder of those companies present in the Stock Basket when you invest ‘through’ Smallcase. But when you invest ‘in’ a Mutual Fund, you are just buying the Units of Mutual Fund and not the stocks that make up the portfolio of the fund, so you do not become a proud shareholder of a company when you invest in a Mutual Fund.

When a Mutual Fund buys or sell any stock from their portfolio the tax burden is not carried by the Mutual Fund Unitholders but when a Stock Basket is re-balanced, the tax burden that comes with the re-balancing falls on the portfolio owner.

Different Categories in Smallcase are:

For New Investors – It is for the newcomers, who are just starting into Direct Equity Investment. There are 6 Baskets present at the moment in this category. Most of the Stock Baskets in this category contains Big, Established, Bluechip Companies.

Smart Beta – The baskets on this category are mainly for passive investors. The Stock Baskets in the Smart Beta category mostly consists of well established Large Cap companies. This category aims to provide a market-beating return at low risk.

ETF Smallcase – Stock Baskets in this category are made out of ETFs or Exchange Traded Funds(Will make a blog on this too). The baskets are more geared towards general market investing. As the cost of each ETF Unit is low so does the baskets in this category.

Long Term – This category mostly contains baskets oriented around the public consumption sectors of the economy like Private Banking, Logistics and Transportation, Purchasing Power of the Indian Middle Class, etc.Stock Baskets from this category are designed for Long term investment. An intermediate investor who will not panic during a crisis like the Pandemic should invest through the baskets present in this category.

Dividend Income – By far the favourite category of ours.The Stock Baskets in this category are made to provide Investors with a regular income in the form of Dividends. These baskets again mostly contain Big, Established, Dividend Paying Bluechip Companies and some of them have paid dividends to their shareholders for more than 10 Years.

Sector Trackers – The baskets in this category are simply different economic sector tracker. In this category, Smallcase has a basket starting from Auto to FMCG to Infra to Pharma to Realty.As Sectorial Investing comes with its own set of risk, these baskets are not ideal for any Begineer Investor.

Government Reforms – By the name you can understand that this category contains Stock Baskets that are focused on the Government Policies and Reforms. All the positive initiative from the government will reflect in these baskets.

Growth Investing – Baskets in this category are made following any particular famous ‘Methodology’ of Investing. As the stocks in these baskets are chosen because of their Growth Potential, the risks associated with these baskets are high too.And along with all these categories when you login in with a particular broker, you will find some more Category or Stock Baskets which are associated or might be developed by that broker.

To conclude:

Stock Baskets are still new in India also the reality of investing through Stock Baskets is different. Regular portfolio updates and re-balancing will take a chunk out of the investor’s profit in the form of Taxes. And not to mention the loss borne by investors due to selling of securities when they are in the red. For me, Smallcase is a great tool to find new companies in different sectors and themes but it is not the right investment medium for Direct Equity Investment. We would use Smallcase as a Screener rather than an Investment Medium.

Disclaimer: This is my opinion and not paid promotion ;)