Introduction and about smallcase
Smallcase is a platform that is used to invest in model portfolios of the stocks of companies, ETFs, and REITs. It is Bangalore based startup that focuses on equitable investing in India. The app allows investors to buy and sell securities on the basis of their predefined combinations. Currently, seven brokers have collaborated with smallcase and are offering their services on the platform. These seven brokers are Kotak Securities, HDFC Securities, 5paisa, Edelweiss, Zerodha, and Axis Securities. Each of the combinations or portfolios has a predefined strategy or goal.
This is different from Mutual funds as mutual funds do not give you direct ownership of the stocks of the company. But in the case of smallcase, you get direct ownership of this portfolio of securities. Investing in smallcase gives the investors an advantage of diversification and minimizes individual stock-related risks. Investors are free to add or remove stocks as per the investor’s discretion. However, the investors cannot do not sell any stock directly to the trading platform. To understand the further working of smallcase, we will take the example of Zerodha as a broker of smallcase.
Zerodha has collaborated with smallcase for Zerodha Smallcase 2.0 which offers a theme-based portfolio. Themes are based on three basic factors of experience, observation, and changes around the financial environment. So the pro of thematic investment lies in the understanding of future changes and earning the benefit of the changes. Zerodha offers easy query assessment and answers by its investment management team. Zerodha does not charge any smallcase fees for using the platform and the management fees are flat 100rs+GST.
However, Zerodha small case 2.0 is still not supporting BSE stocks, the available Smallcase are very easy to manage and convenient due to the constant updates of every stock held. The app also shows the risk level of every basket of securities. So one can invest in a portfolio managed by professionals at their convenience and also get the ownership of the stocks invested into. The biggest advantage of using Zerodha for the investment in small cases is that it does not have any additional small case charges or small case fees when you exit or rebalance your small case. You even get SIP by Zerodha Small case 2.0.
For the first time, there is a platform focusing only on basket investing. The stock portfolios which are put together by a team of portfolios are periodically rotated and rebalanced as per the economic situation. The review is done by assessing the Pros and cons of investing in smallcases
Benefits of smallcases:
- You have direct ownership of the stocks held
- You can enjoy tax-free dividends
- Professionally managed portfolio and reduced analysis and research by investors
- Periodically rotated and rebalanced that solves the investor dilemma of knowing when to sell.
- No Lock-in period
Demerits of smallcases:
- Different brokers have different policies of rebalancing and rotation. Many instances require you to pay brokerage and taxes every time the portfolio is rebalanced or rotated.
- The analysis for the basket of securities is based on its past performance and the charts represented are only the backtest not involving the tax and brokerage expenses, which makes the charts and analysis represented inaccurate.
- There is some amount of portfolio churning and active investment involved in smallcases and hence is not a passive investment strategy.
Smallcase vs Mutual Funds and Equity Trading
Research of stocks by investors
Negligible to minimal
Not existing if not built a portfolio
There is a lock-in period for closed-ended funds and a few open-ended funds, depending on the terms and conditions of the fund
Cost of Investment
Cheaper than Mutual funds. Mostly includes brokerage, taxes, and management fees.
High expense ratio. Includes management fees, brokerage, taxes, salaries of the managers, and various other expenses as a part of the expense ratio.
Brokerage and taxes are the only components.
Transparency and control
Partially controlled by managers and partially by investors. The portfolio is fully disclosed to the investor at all times.
Fully managed and controlled by the fund managers and the portfolio are disclosed at fixed periods of time.
Fully managed and controlled by the investor
Ownership of securities
By the investor
By the fund
By the investor
Degree of diversification
Restricted diversification based on the theme or strategy.
Customizable degree of diversification
High depending on fund-to-fund
The smallcase provides an extremely unique proposition to the investors and provides the investors with a ready-made portfolio without them being involved in extensive research. Constant rebalancing will cause a part of returns to be reduced due to taxes and brokerage paid, however as compared to mutual funds, expense ratios are not paid to anyone and the expenses are comparatively even lesser. Direct ownership of the stocks gives the investor the right to tax-free dividends that is directly transferred to the investor’s bank account. This investment bracket is extremely helpful for people who understand the various themes of the economy and who are semi-actively trading.
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