Each smallcase is a diversified portfolio of stocks/ETFs that has an underlying theme.
1 Please explain about smallcase Technologies
Smallcase Technologies is a Bangalore based FinTech company that is changing the way India invests by offering simple, low-cost & transparent investment products. We do this by building platforms & infrastructure for the Indian capital markets ecosystem - brokerages, investment advisors, research analysts & AMCs - while focusing on the ultimate retail investor.
“smallcases” are a safer way to directly invest in the stock market. Each smallcase is a diversified portfolio of stocks/ETFs that has an underlying theme (e.g. electric cars or consumption) or an investment strategy (e.g. value or smart beta). The smallcase platform enables retail investors to invest in these readymade portfolios from any of our brokerage partners (currently, we’re partnered with 8 leading brokerages).
Today, more than 35 SEBI licensed investment professionals create & manage smallcases, including:
• In-house research teams of brokerages like HDFC securities &AxisDirect
• Registered Investment Advisors (RIAs) like Alok Jain of WeekendInvesting
• Portfolio Management Services (PMS) like Capitalmind run by Deepak Shenoy
• Research Analysts (RAs) like RaghavBehani of Alphamultiple
• In July 2019, ICICI Prudential AMC also created & launched 3 smallcases that are based on their ETFs
2 What is so unique about your offering?
smallcase is a new financial instrument that builds on the advantages of mutual funds (introduced in the early 1920s). It mixes the advantages of direct ownership of stocks with the core idea behind mutual funds, i.e. building diversified portfolios.
Compared to single stocks, smallcases are a safer way to invest directly in the stock market since they’re diversified.
Compared to mutual funds, smallcases don’t have an expense ratio, which makes them cost-effective when compared to other instruments like mutual funds. Also, since the underlying securities are held in the investor’s demat account, they have complete control & transparency into their investments.
3 What are the kind of opportunities you saw when you developed the product and you see going ahead?
Investing in equities has proven to be the most rewarding vs. other assets like gold, real estate, etc. Yet, the common perception about investing in the stock market is that it’s risky & even akin to gambling. With smallcases, that’s exactly the problem we’re trying to solve by providing existing & new investors with a safer way to directly invest in the stock market.
In fact, coming from a family that used to invest in the stock markets, I’ve seen first-hand how risky investing in single stocks can be.
Growing up in a family that used to invest in the stock markets provided me with first-hand exposure on how risky investing in single stocks can be, especially if the investment decision isn’t based on fundamental & technical grounds.
When I learnt about diversification & the concept of building portfolios – that’s the same core philosophy of mutual funds – it was quite surprising to see that despite its benefits, it wasn’t available to regular stock investors & not offered by brokerages.
Now with smallcases, investors have the ability to directly invest in the stock market in a more diversified and safer manner. Given how under-penetrated the financial market is in India, we see great scope in this space in the coming years.
4 What is your revenue model?
Fees is one of the most talked about topics in the investments world, though very few outside it truly understand how much of an impact it has on the final returns. Like most other leaders in this field (including Warren Buffett), we believe fees eat into long-term returns. As such, our focus has always been to be low-cost.
On the smallcase platform, the client is only charged when they transact – and only on the transacted amount, rather than the entire investment amount. To put this in context, mutual funds charge an expense ratio which is deducted on a daily basis, and is based on the entire investment amount.
As a business, we’re also building/developing other products like Tickertape, Publisher, and Gateway - each with its own business model.
5 You had a last round of $8M Series-A funding led by Sequoia India. Where have you utilised the money? What are your fundraising plans?
The money is being utilised by accelerating our product expansion, investing in infrastructure for the capital markets & hiring more world-class talent to join us in our journey. This includes partnering with retail brokerages to bring smallcases to more investors, working with SEBI-licensed professionals to expand the ecosystem, improving the product offerings, etc.
6 You call yourself a company that offers a new way of investing in equities. Do you see any threat from the traditional method of investing in Mutual Funds?
We feel that the market is big enough. We cater to a niche client/investor base that’s more savvy & educated to invest directly in equities - and smallcases serve various use-cases that can’t be captured by mutual funds structurally. We’re one (new) type of investment instrument that provides exposure to equity/capital markets - and will work with the ecosystem to accelerate inflows into the equity asset class, which is ultimately important for the economy in the long term.
7 What are your future expansion plans?
For 2020, we'll continue to build and deepen infrastructure for the capital markets and our partners, keeping the individual investor at the core. This would include developing unique investment products for different use-cases, enabling advisors to scale more efficiently and unlocking new touch-points for stock/ETF transactions.
8 What is your advantage over a mutual fund?
Both smallcases & mutual funds are diversified portfolios of stocks that are managed by SEBI licensed professionals - but they have some key differences as well:
1 Direct ownership of stocks: underlying stocks credited to existing demat account
2 Cost effective: Unlike mutual funds, there are no management fees that are deducted every day from your investment. With smallcases - brokerage fees only apply when you transact/place orders, and this is far less than the average expense ratio of MFs
3 Control & Transparency: Unlike mutual funds where you hold a unit, with smallcases you hold the actual underlying stocks in your account - so you know where your money is invested & make changes to the portfolio if you want
4 Created by professionals: any SEBI licensed professional (RIA, RA, or PMS) can create smallcases via the Publisher Platform. Current creators include HDFC Research, AxisDirect Research, Deepak Shenoy of Capitalmind (more below).
5 Flexibility: smallcases have no restrictions on portfolio constituents, and as such can be more nimble to market conditions and be customised to the investors’ needs
9 Since your inception, how many customers have you acquired?
Since our initial launch with our first broker partner (Zerodha) in July 2016, the smallcase community has grown to approx. 8 lakh