As an investor, if you want to invest in stock market, then you have 2 options: Either you invest your money directly in stocks or you invest in equity based mutual funds.

But, these days you might have heard about smallcase investing. So in this article, we will discuss what exactly is smallcase investing and how different is it from mutual fund investment.

We will first start with understanding the context behind smallcase, 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 funds and smallcase.

Context: Theme based investing vs Market cap based investing

Many years ago, investors did not have the option of mutual funds. They only had the option of investment in the stock market. Now stock market investment had its own set of risks. Moreover, it was difficult for the retail investor to identify quality stocks and enter and exit at the right time.

Then came the concept of mutual funds where the fund manager would pool money from investors and invest in a set of stocks rather than single stock. This would provide diversification and reduce the volatility in the return. Moreover, the investment is done by experienced professionals whose entire job is to do research and identify good stocks to build a nice mutual fund portfolio.

Now, the major categorization of mutual fund is based on “market cap”. For example, they have large cap mutual funds, mid cap mutual funds, small cap mutual funds, etc.

So, for example, if a mutual fund is a part of large cap category then min 65% of the investment would be in large cap companies. It would include companies from various sectors.

But then in 2015, 3 students from IIT kharagpur came up with an idea. They thought, “What if the investors get an option to invest based on a specific theme or a specific idea?” And they started smallcase technologies. Let us understand more about this company.

Company information

• Founded 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 this way - You don’t buy 1 stock of a company but you buy an entire bouquet of stocks based on a specific theme. For example, a theme could be “rural demand”. Now you will get a smallcase which is essentially a bouquet of stocks that fall under the theme of “rural demand”.
• Since inception, smallcase investing is one of the fastest growing companies in the Fintech space and it is backed by investors such as Sequoia capital India, Blume Ventures, etc. Recently, HDFC bank has also invested an undisclosed amount in smallcase technologies.

• You can either select a specific smallcase based on the theme or idea you like.
• Smallcase provides the opportunity for financial planners or research firms to create their own smallcases and you can choose from the smallcase.
• In fact, even you can create your own small case and invest in that with a single click rather than buying every stock individually.

Collaborations

• So far they have collaborated with many top brokerage houses. Zerodha was the 1st 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 the brokers that have partnered with smallcase. For example, if you have an account with Zerodha, then you can log in to smallcase via Zerodha credentials and invest in the smallcase.

Smallcases 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. So the smallcase investment amount would depend upon the portfolio. For example, if a particular smallcase has a minimum amount of Rs 15,000 and tomorrow the smallcase make changes in the portfolio to remove few stocks and add few stocks then you will have to adjust your investment amount accordingly.
Charges:
The charges would vary from broker to broker. For example, if you invest in smallcase via Zerodha, you will have to pay Rs 100 to buy the smallcase for the 1st 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 the smallcase then you will have to pay the charge just like you buy or sell stocks on Zerodha. For example, there is a STT i.e. securities transaction tax of 0.1% and then demat charges on sell of every stock in the portfolio.

Mutual fund vs Smallcase

• In mutual fund, when you invest in a fund, you buy units and not the individual stocks. In smallcase, you buy the stock rather than the unit. For example, if there are 10 stocks in the smallcase and the total price of 1 share of each stock is lets say Rs 25,000 then you would need to invest a minimum of Rs 25,000 for the smallcase. Whereas in mutual funds, you can invest as low as Rs 500 irrespective of the stock price.
• Mutual funds are managed by mutual fund managers of respective fund house. Whereas smallcases are managed by different entities including research firms, financial planners, etc. For example, if you invest in Axis bluechip fund scheme then it is managed by a fund manager working in Axis fund house. You can also check the details of the fund manager. Likewise, you can see who is managing the smallcase but in case the smallcase is managed by the research house like Windmill capital, I couldn’t find the fund manager detail.
• Mutual funds predominantly have categorization based on fund size whereas smallcase portfolio is built on the theme or idea. As we discussed earlier, mutual funds are mainly categorized based on market cap like large cap, mid cap, small cap, etc. However, smallcases are built on theme or idea like rural demand, great indian middle class, etc. Although, mutual funds also have the theme based investing option.
• Risk vs return: Vary from mutual fund to mutual fund and smallcase to smallcase. For example, if you want to invest in bluechip stocks, then you have large cap mutual funds which are relatively less volatile. Likewise, in smallcase, you have 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 beat mutual funds or mutual funds would beat smallcase. It would depend upon mutual funds to mutual fund and smallcase to smallcase.
• Cost: Mutual funds have expense ratio whereas smallcase cost would vary from broker to broker. For example, if you invest in direct mutual funds then you would have to pay an expense ratio of 0.5%-1% and index funds expense ratio is even lower. Whereas, if you invest in a smallcase via zerodha then you need to pay Rs 100+18% GST and then the individual cost of each stock buy/sell in the smallcase every time you invest your money.
• Both rebalances the portfolio periodically.