One way of investing in equity is directly purchasing retail stocks from your brokerage account. But that comes with a lot of homework, like reading the company’s financials, keeping up with the news and what not. Another way is to invest in mutual funds, but then you lose control over your investments. If you, as an investor, frown upon these two options, say hello to your friend, Smallcase. Here, you can buy a thematic portfolio of stocks managed by investment professionals that tracks a particular trend or an idea.
Note: Instances or examples mentioned in the article are just an illustration and not any investment advice.
What is a Smallcase?
Smallcase is a basket of stocks or ETFs that mirror a particular market theme, a financial model, or an investment plan. Smallcases help investors diversify their portfolio according to their personal interests. The concept was founded in 2016 by a Zerodha-backed company, Smallcase technologies.
Let’s say you’re a techie and believe that the IT sector will do really well in the next decade. So you start investing in a smallcase that tracks the IT stocks. Your gut feeling turns true, and while the IT sector flourishes, you make a mint out of it too. Fine and dandy, right? Now let’s understand the nitty gritty of smallcases.
How do Smallcases work?
Smallcases are managed by research analysts, portfolio managers, investment advisors or a brokerage house registered under SEBI. In order to invest in a smallcase, you need to have a demat account. When you invest in the smallcase, the stocks in that portfolio are directly reflected in your demat account. You will also receive the dividend if your portfolio includes dividend stocks. The capital gains and dividends will be taxed as per the standard tax slab. In fact, you will also find separate smallcases dedicated specifically for dividend yield.
For every smallcase you purchase, it levies a fee of ₹100 or 1.5% of your investment amount (whichever is less) along with the applicable GST. However, you won’t have to pay for rebalancing or managing your smallcases.
Types of smallcases
1. Trend based:
Trend based smallcases follow the prevalent market trends and invest in companies relevant to the trend. The portfolio manager keeps rebalancing the smallcase as per the changes in the market.
2. Volatility based:
We all have different risk appetites. While some love the thrill that comes with high volatility, some like to play safe. Smallcase has all kinds of portfolios ranging from high, moderate and low volatility stocks.
3. Beta themed
Beta themed smallcases use a quantitative investment approach by using statistical and mathematical strategies to generate good returns.
4. Industry themed
These smallcases contain a portfolio of stocks belonging to a particular industry, like banking, IT, or Agriculture. Hence, if you are bullish about an industry’s performance in the coming years, this one’s for you.
Smallcases v/s mutual funds
Smallcases are often confused with mutual funds. While both investment products follow a similar operation pattern, they’re significantly different from each other.
Smallcases do not have a lock-in period, whereas some mutual funds might demand you to stay invested for a specific time frame. Also, smallcases do not levy any charges to exit the investment, but you might have to pay an exit load to sell your mutual funds.
Small cases are volatile in nature, but also provide a higher CAGR than mutual funds. Mutual funds are a safer option, but their returns might not be as lucrative as smallcases.
Coming to ownership, when you buy a smallcase, you have ownership rights of the stocks in the smallcase portfolio. In the case of mutual funds, you do not own the shares but the units of the mutual fund in question.
Smallcases can be a great investment avenue indeed. But the volatilities of the market have taken down even the best of securities, and smallcases are no exception. However, they can be a good option for asset allocation, especially when you’re skeptical about buying retail stocks.