Smallcases make a big splash among young investors: Here's why

Experts flag inadequate regulatory oversight; concentrated and thematic nature of most portfolios makes them riskier bets

More than 3.5 million users. An estimated Rs 14,000 crore by way of investments. And a host of brokers and portfolio managers lining up to be part of the frenzy. For a product that has hardly been around for a few years, curated portfolios, or smallcases, as they are popularly called, are making quite a splash in the investment fraternity.

Introduced by Bengaluru-based start-up smallcase Technologies in 2016, such portfolios comprise stocks or exchange traded funds (ETFs) that reflect a theme or strategy, and are managed by professionals with a registered investment adviser, research analyst or PMS (portfolio management services) licence. So, a dividend-yield smallcase may be made up of high-dividend paying stocks and a PSU smallcase, of profitable and undervalued PSU stocks.

Affordable pricing, a variety of themes, and the ease of transacting are among key reasons that have made smallcases a hit among young investors. Such portfolios typically consist of five to 10 stocks and cost around Rs 5,000-20,000, making them suitable for investors who can’t afford PMS where the ticket size is Rs 50 lakh and above.

“The rapid adoption of digital transactions after the pandemic, a shift in the asset allocation strategy in a low interest rate environment, and the need for diversification have driven investors towards portfolio investing,” said Vasanth Kamath, founder, smallcase Technologies, which got the backing of American e-commerce major Amazon last month.

Thirteen brokers have signed up with smallcase Technologies, which has listed more than 250 strategies on its platform created by more than 150 portfolio managers. Another start-up WealthDesk has 60-plus portfolios, christened WealthBaskets, on its platform and has partnered with 20 brokers, with another 25 expected to sign up soon.

“Investors are willing to pay something extra if their investment goals are taken care of by experts while staying in control of their investment choices. WealthBaskets enables that at a competitive cost,” said Ujjwal Jain, founder, WealthDesk, which recently tied up with Paytm Money for portfolio offerings.

Brokers such as Aditya Birla Money, Geojit, Fyers, Prabhudas Lilladher, and Reliance Securities are offering their own curated portfolios to their clients. Prabhudas Lilladher has also listed multi-asset strategies on the smallcase platform for investors who are not its clients.

ICICI Securities is offering portfolios created in-house as well as those curated by the likes of Abakkus Asset Managers, AlfAccurate Advisors, and Carnelian Asset Advisors to its clients. It also offers over 70 portfolios comprising US stocks and ETFs based on models constructed by global fund managers, and managed by Interactive Advisors, a US-based investment advisor.

“The product has clicked with investors who want direct equity exposure with the safety net of research-backed stock diversification,” said Vijay Chandok, MD & CEO, ICICI Securities.

Prominent portfolio managers whose firms have signed up on these platforms include Abakkus’ founder Sunil Singhania, First Global Vice Chairman Shankar Sharma, Capitalmind CEO Deepak Shenoy, Weekend Investing founder Alok Jain, and Renaissance Investment Managers founder Pankaj Murarka.

“These platforms can enable a lot more investors to access strategies created by professional portfolio managers. It’s early days, but the potential to scale up is huge,” said Singhania.

Grapevine has it that a large asset management company has entered the space and others are keeping a close watch. AMCs that also run PMS and AIF arms may find this space inviting, notwithstanding the possible regulatory constraints.

Risks involved

For all its benefits, investing through this route has its drawbacks. Unlike mutual funds, smallcases are not an SIP-friendly model as the investment amount is not fixed. Say, for example, five stocks in a basket cost Rs 100 each. If the prices of each of these move up by Rs 25 in a month, the basket will become dearer by Rs 125. Most baskets are rebalanced every month or every other week, which can add to the tax burden of investors.

The plethora of themes and periodic rebalancing makes benchmarking or comparing one basket to another practically impossible. Portfolio managers can resort to style and market cap drift. Besides, the concentrated and thematic nature of most portfolios makes them riskier bets.

“There is no data available to showcase the risk-adjusted performance of these smallcases and there is a huge tracking error. This is because the price at which the stocks are bought and sold by investors may be very different from that which was recommended,” said Kirtan Shah, CEO, SRE Wealth.

The lack of track record of several portfolios and their fund managers has also raised red flags. “A lot of strategies are tom-tomming back tested data that goes back two, three or five years. But I would take these with a kilogramme of salt,” said financial planner Suresh Sadagopan, who is currently not recommending these baskets to any of his clients.

As a safeguard, smallcase Technologies aims to introduce a review and rating system in the next few months.

Do-it-yourself investing may be here to stay but the 'gamification' of the process is worrying experts. “Investing in products without proper regulatory oversight is akin to batting without adequate safety gear,” said an industry official. “Investors that look for excitement are also the ones more likely to meet with major accidents.”