A mutual fund investor spreads his investment across a basket of stocks by investing in units of mutual funds. An investor can also invest in Sectoral Mutual Funds like Pharma, Banking, Infrastructure etc.
Thematic investments is a broader approach to identify financially sound and sustainably growing companies whose business models are based on particular themes or ideas and would include companies across market capitalization and sectors. Thematic investment philosophy involves identifying curated or theme-based stocks which support a particular idea or theme like Rural Development, Robotics, Future Mobility, Make in India etc. However, an investor willing to invest in direct equity would have to spend considerable time in identifying such stocks and executing individual orders for stocks instead of a single click order to invest in a basket of the thematic or curated portfolio of stocks.
If you have a perfect investment methodology and philosophy but lack time of investing in specific stocks or funds, then Smallcase Investing is an option for you.
Bengaluru-based Smallcase Technologies is a start-up by three IIT graduates, which have introduced an exciting technology-based platform for modern retail investors allowing them to invest in a basket of stocks / mutual funds that reflects an idea or a theme. Each theme consists of professionally tailored baskets of stocks that reflect an investing theme, idea or strategy.
This concept is very popular in the developed markets and is made available by various intermediaries like Motifs, Personal Capital, Tiger Brokers, Cazenove Capital and Jarvis Securities.
While Smallcase was initially incubated by Zerodha but have now collaborated with several online brokers (13 as of now) including Kotak Securities, HDFC Securities, 5paisa, Edelweiss, Zerodha and Axis Securities. Smallcase has gained popularity among new and young investors and has become synonym with a curated portfolio-based investment strategy. An attempt has been made in this article to explain the concept illustrating the platform provided by Smallcase and can be applied by investors to other service providers offering a similar platform.
Smallcase ecosystem consists of:
• Technology platform provided by Smallcase – They charge fees to Smallcase managers for providing the platform.
• Trading platform provided by Stock Brokers for the execution of trades by investors – They charge commissions to investors for the execution of trades through their trading platform.
• Research and Advisory Services provided by Smallcase managers who are SEBI registered Investment Advisors, Research Analysts or Portfolio Managers (PMS) – They charge fees to investors (either a fixed fee or percentage-based fee).
• Investors – Investors have the option of investing on a thematic basis.
The following table shows the comparison with a mutual fund:
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PARTICULAR
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MUTUAL FUND
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SMALLcase
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Ownership
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You own units of the mutual funds and not the underlying stocks
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In the case of Smallcase, you directly own the stocks. Equity
Mutual Funds only need to disclose their holdings once a month, so you don’t
necessarily know what your fund owns at any given time (this is not
necessarily a bad thing given you have delegated the task of picking stocks
to the fund manager). With Smallcase, you know exactly what you own because
the holdings sit in your Demat account
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Holding Pattern
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Mutual funds investors own units of mutual funds, which are
separate from stocks. So, the holding pattern is based on mutual funds units
and not related to stock
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Smallcase investments give direct control over the holdings. The
shares are held directly in the investor’s Demat account, and the dividends
are transferred to the bank account. Also, in case a particular stock isn’t
performing well, the investor can sell those shares and continue to hold the
remaining part of the Smallcase
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Taxes
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A mutual fund where the investor pays tax
only upon redemption of units. Hence the overall tax burden in this structure
is expected to be higher
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Every time investor sells the stock, he shall pay short-term
capital gains tax
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Lock-in
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If mutual funds investment is redeemed before the expiry of the lock-in
period, it may even attract an exit load
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Investment through the Smallcase platform does not have a
lock-in period
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Portfolio Diversification
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Mutual funds offer a wide variety of diversification, as mutual
funds can invest in 100+ companies
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Smallcase follows a strategy, idea or theme and investment in a
particular Smallcase is restricted to a particular strategy, idea or theme.
So, the diversification is limited to a particular strategy, idea or theme
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Capital requirement
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Mutual funds investors have the option of buying mutual funds
units, thereby even small investment by investors is feasible
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Smallcase requires a higher capital for investing in comparison
to mutual funds. In a Smallcase portfolio, one has to invest in at least 1
share of particular shares, thereby requiring higher capital investment
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Expense Ratio
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The mutual fund expense ratio is determined by SEBI and its
range is between 1-2%
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Some Smallcase are open to the public, while some are with a
subscription. Some cases are created by the in-house teams, while some by
external analyst companies. Therefore, the charges vary accordingly
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Exit load
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Some scheme of mutual funds can charge up to 1-2%
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There is no exit load in Smallcase
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HOW IT WORKS
The platform offers a user interface to invest in multiple baskets of stocks / ETFs based on a theme selected by the investor. An investor can either invest in a Smallcase created by SEBI registered individuals / entities such as registered investment advisors, research analysts or portfolio managers or create his or her own Smallcase with two or more stocks or ETFs.
For Example, if an investor wants to invest in the theme of growing rural consumption in India, they can directly buy a Smallcase that is curated by experts representing this particular theme. The underlying constituents of the Smallcase would have stocks that would form part of the underlying theme along with the weightage assigned to their share in the overall basket.
The investor can place a consolidated order for all the underlying stocks with a single click through his respective broker. In case of any issue of order fulfillment, the investor can repair the Smallcase later by replacing the fresh order and ensuring the portfolio complements the original theme.
The professionally managed Smallcase are periodically updated by the Smallcase manager to continue tracking the underlying strategy or theme. These updates in the portfolio composition are shared through the platform to the investor so that the investor can make the changes to reflect the updated composition.
The investor has the option to exit the Smallcase which would trigger sell orders across all the underlying securities within a Smallcase. In every Smallcase, investors can set up a SIP (Systematic Investment Plan) to invest a fixed amount to the selected portfolio every month following the first investment.
USING SMALLcase INVESTING OPTION
• Choose: Go to the Smallcase website and click on login. You have to use the credentials provided by your broker to log in. However, if you use any other broker other than mentioned above, you may not be able to access the services.
• Buy: Once logged in, the investor has the option to choose from the array of themes such as all-weather, smart beta, bargain buys, electronic vehicles among others.
• Track: You will now be able to see stocks that form part of the portfolio, their proportion and the rationale behind their inclusion. You can customize the Smallcase by adding or removing stocks.
• Manage: While some brokers allow you to create your personalized Smallcase, others offer curated Smallcase.
It offers the convenience of one-click investing for transacting in a basket of stocks. Once the theme is selected, an investor can also opt for SIP (Systematic Investment Plan) similar to Mutual Funds.
Any investor can create its own model portfolio (Smallcase) or invest in professionally managed Smallcase created by SEBI registered entities or individuals such as research analysts, registered investment advisor (RIA) etc. The creation and management of Smallcase are restricted to registered entities only.
The concept of thematic investing is fast gaining popularity among retail investors who prefer DIY (Do it Yourself) stock / MF selection. In fact, theme-based stock / ETF investments are becoming akin to Smallcase. The concept is riding on the bull market and is yet to face a major market correction that will test the inherent quality of underlying research. It is advisable that investors should do their own due diligence before investing instead of just getting carried away with market sentiments.
Note: The purpose of this article is only to make the readers aware of the concept which is gaining popularity amongst investors and is not to influence readers to trade or invest. The reader should exercise caution before they start using the platform.
