Pre-Fabricated Portfolios

Pre-Fabricated Portfolios

Pre-fab portfolios for investors with a view. SmallCase offers some readymade portfolios with about 20 stocks each. While costs are low, this is for investors with in-depth knowledge and not a novice.

For do-it-yourself equity investors, it’s about buying and selling individual stocks. Sometimes, however, there are market events or policy changes that impact an entire set of stocks in the same industry. If you hold a view on what the impact of, say, demonetization, will be on the banking sector, you may want to take exposure to the entire sector rather than just pick one or two stocks.

How does one do that? There are some sector-based exchange-traded funds (ETFs), index linked derivatives and thematic and sector equity mutual funds that you can buy for this purpose. Along with these, there is a new platform by Smallcase Technologies Pvt. Ltd. For example, if you think there is a set of companies that might benefit from the goods and service tax (GST), there is a GST Opportunity SmallCase tracker. There are 12 stocks in this portfolio in equal weight, picked because they stand to benefit from GST implementation.

Similarly, there are about 45 more ‘SmallCase’ portfolios built either on themes like digital inclusion and Indian middle class, or to track sectors like speciality chemicals or banking privately among others.

What is it?

A SmallCaseis built as a portfolio of about 20 stocks of a common theme or same sector. The proportion is usually equi-weight and there is no bias towards one over the other. The stock selection methodology and rationale is explained for each. Don’t confuse this with a broking product as it is not offered by a broker. Neither should you think of this as a managed fund with regulatory approvals. These equi-weighted portfolios are built with the help of technology- and research-driven selection based on financial metrics, rather than fundamental analysis. There is no advise or recommendation involved on which portfolio might do better.

SmallCase intends to tie up with brokers who offer their execution platform for buying and selling the stocks. The objective is to give individual investors an avenue to invest in diversified portfolios within a theme but without fund manager intervention and selection bias.

Vasanth Kamath, founder and chief executive officer, SmallCaseTechnologies Pvt. Ltd, said, “It’s a means for investors to execute their market view through readymade portfolios. Stocks’ weights are based on revenue exposure of a company to the theme and we don’t have more than 20 stocks in a portfolio.” He clarified that this is trading platform registered with National Stock Exchange, and they are an associate linked with discount broker Zerodha Pvt. Ltd.

Investors can sign up to open a trading and dematerialisation account with Zerodha, which then gives them access to SmallCase portfolios through Bank account linking and know-your-customer (KYC) process is done as a result of account opening with Zerodha. Once done, you can pick portfolios online and invest immediately. There is a different minimum amount for each portfolio, which ranges from Rs1,700 to Rs35,000, and the average is around Rs12,000. Stocks are bought in proportion of the weightage in the portfolio.

What’s Good

It’s a simple, diversified, low-cost investment option for equity investors, even those who have small surpluses to start with. The fee is Rs100 per buy for a SmallCase but there is no charge to add more or sell. Being a discount broker, Zerodha doesn’t charge for delivery-based equity buying. Investments can be tracked and managed real time. The stocks bought are directly owned by you. A standard thematic portfolio is already created, and there is no fund manager bias or expense involved. In the coming months, a facility to customise the portfolio—add or remove stocks as per your requirement—will also be available.

Nithin Kamath, chief executive officer, Zerodha, said, “This is an opportunity for us to widen our customer base. More importantly, such platforms help in deepening markets by encouraging more participation.”

What It’s Not

Smallcase is not meant for everyone. The investor must have more than a basic understanding of the market to know which theme to follow.

“Post-demonetization we saw an increase in transactions for banking and pharmaceuticals SmallCase trackers. Such activity reflects investor expectations; we don’t recommend buying one over the other,” said Vasanth Kamath.

This means you need to have a view. SmallCase is not about advice; rather it’s a platform to transact. You won’t be alerted to shift or sell if the portfolio value declines.

At present, execution for trades is available with only one broker, although there are ongoing talks with others. It may be a while before others offer this as brokers Mint spoke to felt they could develop such a product in-house.

Investors will also look for stability in a new platform. Kamlesh Rao, chief executive officer, Kotak Securities Ltd, said, “For us the key is differentiating through our product offering and research capabilities. It would not make sense to outsource that to others.”

SmallCase trackers are another way for equity investors to take on the stock market. It is a new, but fast-growing platform with around 17,000 users and 150,000 orders put through so far. The biggest advantage is its pre-built diversified portfolios at a low cost. Platforms such as these can help in deepening participation in domestic equity markets. But you must have the knowledge, time and ability to invest.

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