Is there a case for Smallcase?

What is a Smallcase ?

Small case is a way to invest in a curated basket of Equity stocks with specific allocations to different stocks based on a certain idea, strategy, theme or objective.  These are called Smallcases.

It is offered on a platform run by Smallcase. The Smallcases are offered by different SEBI Registered managers / advisers. There are over 250 Smallcases approximately and more keeps getting added all the time.

There is a minimum size of a basket you may be able to buy in each small case offering. For instance, in the Smallcase called Top 250 Stocks by Windmill Capital, the minimum investment is Rs.1,129 only. This minimum investment is different for different Smallcases.

How does it work?

One will have to open an account with one of the twelve brokers associated with Smallcase. One will buy Smallcases like one buys a stock through the broker. Brokerage is applicable on trades and a demat account is necessary for receiving the Smallcases. When one buys and sells the underlying stocks, one will need to pay capital gains taxes applicable like in the case of direct equity trading.

Recommendations are sent by the Small case manager on a periodic basis (like, on a weekly basis ). The investor has the option to accept the recommendation or reject it and hence offers control over the ultimate investment decision.

However, this can have implications on the ultimate performance of one’s Smallcase portfolio and the returns can vary from what the portfolio would have given if all recommendations had been carried out. Actually, there is not much sense in not following their recommendations, if one has sought them out and have chosen that particular Smallcase for investment.

What are the costs?

We have already seen that the investor needs to pay brokerage. Also, the small case manager will charge a fee, which may be a fixed cost or a variable Asset value based cost. Apart from this, there is expected to be a good amount of capital gains ( especially Short-term capital gains ) arising out of implementing the frequent recommendations of the Small case manager.

How different is it from direct equity investment ?

It is significantly different from direct equity investment as in a Smallcase portfolio there is an expert who has curated a portfolio based on a theme/ idea, who will offer advice on an ongoing basis about selling / buying of these stocks. They get to choose the themes they like.

In direct equity investing, the investor buys/ sells stocks on their own, often based on what they hear, read or watch on TV. This is not an ideal way to invest in equities as most people just end up with a motley and often a jumbo mix of equities.

Smallcase helps the investor avoid this problem.

How is Small case different from a PMS ?

In Portfolio Management Services (PMS) the minimum amount is Rs.50 Lakhs or more as per SEBI Regulations. Here, it is the fund manager who takes the calls on investments (discretionary nature of portfolio management ).

There is a certain period for which there may be exit loads applicable and hence, one may like to stay invested. Partial withdrawals are possible; but it cannot go below the minimum mandated for a PMS. In PMS, there is a management fee as well as a profit sharing, beyond a certain return level.

In Smallcase, the investment amounts are small, there are no exit loads, taking the actions suggested are at the discretion of the investor and there is no profit sharing. In a sense, one may call it a PMS without the negatives of a PMS.

How different is Small case from a Mutual Fund (MF)?

Small case has similarities with MFs. In both cases, there is a fund manager. The minimum amount of investment is low in both cases and both work based on certain mandates.

However, the ideas and themes are restricted in MFs by SEBI and are mostly slotted in predefined categories. The categories are Largecap funds, midcap funds, thematic funds, sectoral funds etc. The fund manager can use their discretion to choose what they want to as per the mandate of the category and choose stocks from that pool.

In Smallcase, it is almost a go anywhere strategy. The Smallcase manager can construct an equity bouquet based on an idea or theme. If that theme appeals to someone, they could invest in that.

What are the disadvantages of Smallcase?

Smallcase is just an investment vehicle. An investor may not know what is appropriate for them in the context of their life situation, goals, risk taking abilities etc. With Smallcase, an investor tends to indulge in their fantasies of themes, ideas and the focus is about returns and not really life goals. The Smallcases they end up choosing may not be suitable for their risk profile/ situation.

In Smallcase, there is a huge element of discretion with the investor. Due to their busy schedule, an investor may not act on many of the suggestions the Smallcase manager periodically sends. There is a fair amount of action required from the investors’ side, which may by itself be a huge stumbling block. Hence, at the end of a period, the return they may get may be quite different from what the Smallcase manager claims is the return from his portfolio.

Smallcases mostly involve a lot of churn and hence can result in a good amount of shortterm capital gains tax. This needs to be factored too.

Our take

Smallcase is a new kid on the block, with a slightly different offering. It is interesting for some as there are enticing themes, which appeal to the investors. However, an enticing theme need not necessarily be suitable for the investor. A diversified investment option like a MF may help in broader participation in equity markets, without picking sides.

An investor is exposed to the same problems of doing investments on one’s own without an overarching plan. As part of an advised bouquet, it may make sense, if the Financial Advisor thinks that a Smallcase may be a good fit in the portfolio. However, the advisor may not want to do all the frequent actions that need to be carried out – that would fall on the shoulders of the investor himself.

All taken into account, Smallcase looks like a fad that offers lots of choices and brings in some excitement to investing. But that does not mean it is a product that would be a great fit when it comes to one’s context & situation.