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All you need to know about smallcases

Satya Sontanam | Updated on April 12, 2021

When there’s a bull market, it is not unusual to see retail investors increasing their direct participation in stocks. But the investment products they flock to, do differ each time. This time round, a popular fad is investing in ‘smallcases’. Most leading brokers today offer ‘smallcases’ on their sites which allow you to buy or sell a ready-made basket of stocks through a single buy or sell order.

What is it?

The idea of allowing investors to buy ready-made portfolios directly, instead of through mutual funds, was mooted by smallcase, a Bengaluru-based fintech start-up founded in 2015. While the investment platform flagged off with its own portfolios to start with, the idea has since been adopted by a diverse set of brokers and money managers who have tied up with the fintech firm, to offer ‘smallcases’ of their own to suit a variety of themes and investment needs.

A smallcase is a basket of stocks that may reflect a particular investment theme, idea or a sector. So, a dividend-yield smallcase may be made up of high dividend paying stocks and an IT smallcase, of leading software firms. Smallcase today hosts dozens of ready-made portfolios and investing strategies that have been created by SEBI-licensed professionals such as brokers and research analysts, using quantitative models and algorithms to screen and weight constituents. Smallcase, which provides infrastructure to the creators of these portfolios, is partnered with all leading brokerages including Zerodha, HDFC Securities, Kotak Securities, Axis Direct, Edelweiss and Angel Broking. While some brokerage houses curate their own in-house smallcases, some rely on smallcases built by a subsidiary of Smallcase, Windmill Capital.

To invest in smallcases you need a demat account. When you buy/sell a smallcase, the stocks/ETFs featuring in it will be credited or debited to your account. The minimum investment amount may vary depending on the stocks that make up a smallcase. Once a smallcase is chosen, you can invest a lumpsum or choose to run a systematic investment in it. Standard brokerage charges are applicable. In addition, there will be a nominal, one-time registration fee of ₹100-150.

Why is it important?

For investors who feel they understand the stock market reasonably well and don’t want to pay for the services of a professional fund manager, smallcases offer a good via media. To build his portfolio, the investor needs to screen the entire listed universe to arrive at his choices. In smallcase, he is offered a ready-made basket of stocks that have been screened by an expertbased on certain parameters.

By making basket purchases possible, smallcases allow you to own a portfolio that can be put on autopilot. You are allowed to make changes to the constituents of the smallcase (remove/add stocks), and also to their weightage, suiting those who like to be more involved in the portfolio. For instance, when a company announces a dividend, a mutual fund may reinvest the money without seeking the unit-holder’s approval. In the case of smallcase, an investor gets to choose whether to reinvest or not. Since an investor does not pay anyone to actively manage the portfolio, the cost of managing money comes down.

Why should I care?

If you want to have some control over your portfolio but don’t have the time to sift through all listed companies, you may consider investing in smallcases. Also, smallcases make basket investing and thematic investing convenient by allowing you to automate the process. You get to follow and invest in portfolios created by some of the famed money managers. But do note that choosing a smallcase to fit your risk profile or return requirements is left to you and so is the timing of your entry or exit, which will decide your returns. In mutual funds, you can choose the right fund based on a track record, category and benchmark comparisons. When choosing smallcases, you may only have back-tested returns and risk indicators to go by. Research and understanding of companies and markets are a prerequisite for investing in smallcases.

The bottomline

Buying ready-made is a convenient option, but it up to you to assess whether the style and fit suits you.

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Published on April 12, 2021

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