What is smallcase investment? | Should you invest in stock via these?

    

As an investor, if you want to invest in the stock market, then you have two options.

  1. You invest your money directly in stocks.
  2. You invest in equity-based mutual funds.

But these days you must have heard about smallcase investing.

What is smallcase investment

In this article, we will discuss what exactly is smallcase investing and how different it is from mutual fund investing. We will first start with understanding the context behind smallcase investing, then, we will discuss the company that started smallcase, then we will discuss the various examples of smallcase, how it works, the fee structure, Who manages the smallcase, various collaborations. And finally, we will identify the difference between mutual fund investment and smallcase.


Story behind Smallcase

Many years ago, investors did not have the option of mutual funds, they only had the option of investment in the stock market and now, stock market investment had its own set of risks. Moreover, it was even more difficult for the retail investors to identify the quality stock and enter and exit at the right time. Then came the concept of mutual funds, where the fund manager will pull money from investors and invest in a set of stocks rather than a single stock. This will provide diversification and also reduce volatility in returns. Moreover, the investments are done by experienced professionals, whose entire job is to research and identify good quality stocks to build a good mutual fund portfolio. Now, the major categorization of the mutual funds is based on "Market Cap", you have got large-cap mutual fund, mid-cap mutual fund, small-cap mutual fund, etc. For example, if a mutual fund is a part of the large-cap category, then a minimum of 65% of the investment would be in a large-cap company, it would include companies from various sectors. But then, in 2015, three students from IIT Kharagpur came up with an idea, they thought about what is the investors get, an option to invest based on a specific "theme" or "idea". And they started smallcase technologies.


Company Info

Established in 2015, Smallcase Technology is a fintech company that allows retail investors to invest in the stock market of India in a portfolio-based approach. Think of it this way, you don't buy a single stock of a company, but you buy an entire bouquet of shares based on a specific theme. For example, a theme might be "rural demand". Now, you will get a smallcase which is bouquet of stocks falling under the theme of "Rural demand". Since its inception, Smallcase Investments is one of the fastest-growing companies in the fintech space and is backed by investors like Sequoia Capital India, Bloom Ventures, etc. Recently HDFC Bank has also invested an undisclosed amount in Smallcase 


Smallcase Collaborations

Till now, Smallcase has collaborated with many top brokerage houses. Zerodha was the first company to tie up with Smallcase, now there are many brokerage houses like HDFC Securities, Kotak Securities, IIFL, 5paisa, etc. In order to invest in Smallcase, you would need to have an account with any of the brokers, that have partnered with Smallcase. For example, if you have an account with Zerodha, then you can Log into Smallcase via Zerodha credentials and invest in these Smallcase.


How it works?

You can either select a specific Smallcase based on the theme or idea you like or Smallcase provides the opportunity for financial planners or research firms to create their own Smallcase, and you can choose your Smallcase for investment. In fact, you can even create your own smallcase, and invest in it with a single click instead of buying each stock individually. Now, this is helpful for those who like to invest in a set of companies every month. So basically, you've got two options...

  1. Invest in your own Smallcase. 
  2. Invest in Smallcase already provided.


Who manages Smallcase? 

Smallcase are managed by financial experts and research companies, you can click on each Smallcase and see who has created the smallcase, they also rebalance the portfolio periodically. Hence, the smallcase investment amount will depend on the portfolio theme. Now, this is very important, please understand this. For example, if a particular smallcase has a total of 15 stocks and the minimum amount of investment in that smallcase is rupees 15,000, then you need to shell out rupees 15,000. Tomorrow, there will be changes in the stock prices, or the smallcase would make changes in the portfolio by removing few stocks and adding a few stocks in that case you will have to adjust your investment amount accordingly.


Fee Structure

The charges would vary from broker to broker. For example, if you invest in Smallcase via Zerodha, you will have to pay rupees 100 to buy this Smallcase for the first time, in addition to this, you need to pay the stock investment charges as usual. For example, if there are 10 stocks in the portfolio of Smallcase, then you will have to pay the charge just like you buy or sell stocks on Zerodha. For example, there is an STT (Securities transaction tax) of 0.1% and then demand charges on the sale of every stock in the portfolio.


Smallcase vs Mutual Funds

  1. In a mutual fund, when you invest in a fund you buy units and not individual stocks, whereas, in Smallcase, you buy the stock rather than the unit. For example, if there are 10 stocks in smallcase, and the total price of one share of each stock is let's say rupees 25,000 then you would need to invest a minimum of rupees 25,000 for this Smallcase, whereas, in Mutual Fund, you invest as-low-as rupees 500 irrespective of the stock price.
  2. Mutual funds are managed by mutual fund managers of respective fund houses whereas, Smallcases are managed by different entities including research firms, financial planners, etc. For example, if you invest in Axis blue-chip fund scheme, then it is managed by a fund manager working in the Axis fund house, You can also check the detail of the fund manager. Likewise, you can see who is managing the smallcase, but in case the smallcase is managed by a research house like Windmill Capital, I could not find the fund manager details. 
  3. Mutual funds are primarily classified on the basis of the size of the fund, whereas smallcase portfolios are built on a theme or idea.
  4. As we discussed earlier, mutual funds are mainly categorized based on the market cap like large-cap, mid-cap, small-cap, etc. However, Smallcases are built on theme or idea, like rural demand, the Great Indian middle class, etc., although mutual funds also have the theme-based investing option.
  5. Risk vs return varies from mutual fund to mutual fund and Smallcase to Smallcase. For example, if you want to invest in blue-chip stocks, then you will have large-cap mutual funds which are relatively less volatile. Likewise, in smallcase, you have got options like "low-risk smart beta" smallcase, which essentially invest in large-cap companies. In terms of return again there is no guarantee that smallcase would meet mutual funds or mutual fund would meet smallcase it will depend from mutual fund to mutual fund and smallcase to smallcase. 
  6. In terms of cost, mutual funds have an expense ratio, whereas smallcase cost would vary from broker to broker. For example, if you invest in a direct mutual fund, then you would have to pay an expense ratio of 0.5% to 1% depending upon the mutual fund scheme and index funds also have a lower expense ratio, whereas, you invest in a smallcase via Zerodha then you need to pay rupees 100 + 18% GST and then the individual cost of each stock buy and sell in the smallcase, every time you invest your money. Both rebalances the portfolio periodically. 
  7. So, if we conclude we can say that smallcase is a middle ground between stocks and mutual funds, rather than owning individual stock, you own a small case which is a bouquet of stock based on a theme or idea. It gives you direct ownership of the stock unlike mutual funds very only units without direct ownership of stocks. Moreover, the biggest differentiator is the theme or idea which is the basis of a portfolio of smallcase, whereas, mutual fund categorization is mainly based on market cap. 
  8. When a mutual fund buys or sells stock from its portfolio, the tax burden is not borne by the mutual fund investors. But when a smallcase is bought or sold, tax based on the holding period comes into play.

This is fancier way to invest in the stock market, which could attract new generations of investors. So, in this article, we investigated FinTech companies, small case technology, and small case investing. I spent a lot of time and energy researching it, and I hope you will like the article and learn some new stuff.

Caution:

It must be clarified that the Smallcase platform can also now not be appropriate for a first-time or new investor, as he or she may additionally no longer be certified sufficient to understand the risks related to the product. It is really helpful to seek advice from a financial advisor earlier than investing via this product.

If you want to know more about investing, you can read this:

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