Smallcase Investing Explained!

Introduction

Before getting into smallcase we need to understand the difference between Equity Investing and Portfolio/Basket Investing.

Equity Investing

Equity investing involves buying the stock of a company directly. eg: ITC . However, this needs a lot of market research (which stock to buy, at what price to buy, when to buy etc) We might loose a lot of money here due to lack of knowledge. Direct equity investing is research oriented.

Portfolio/Basket Investing

Buying a basket of stocks. eg:- contains 2,3 stocks. Here, we buy part/the entire basket.

1. Mutual Funds - There are a wide variety of mutual funds. They are a collection of stocks. A mutual fund has an NAV (Net Asset Value). We can buy a part of this basket called a Unit. This is called Unit investing. They are segregated into large cap, mid cap, and small cap. Also into debts (bonds) vs equity(stocks) mutual funds.
2. Smallcase - Smallcase is also a portfolio of stocks. But here we are owning stocks. We don’t do unit investing here.

Basics

Smallcases are a portfolio/basket of stocks wherein we are owning the stocks directly in our demat account. There are a variety of themes of smallcases, thus we can do thematic investing. Here, we don’t have to do the heavy lifting as in the case of Equity investing where we have to do a lot of research and spend a lot of time analysing the market.

Mutual Funds vs Smallcase

The similarity is that both are managed by professionals.

1. Mutual Funds:
   • There is very little transpareny in mutual funds.
   • It is very difficult to track where your money goes into.
   • The mutual fund manager decides on which stock to buy/sell and when to do it.
   • There is a certain lockin period for majority of MF’s
   • Divided gets invested.
   • Active MF’s - 1-2% commissions, Entry and exit loads
2. Smallcase:
   • It has very good transpareny.
   • We can easily track how money gets allocated into different indexes/stocks.
   • There is quarterly rebalancing of the portfolio
   • There is no lockin period.
   • We will get the divident directly to our account
   • They are designed by certain fund managers and they can decide the commissions 0-3%
   • Some of them are free but there are transaction cost of 100Rs + Other charges (security, transaction etc) eg:- Windmill capital (In house research team at smallcase)

How to invest using Smallcase?

Firstly we need a Demat account (Zeroda, Upstox, Groww etc). Then, link this to smallcase. Goto discover tab, search for your basket of interest and invest money in it.

Charges involved in Smallcase

1. Investment Charges:
   Irrespective of the smallcase type, If you’re investing less than ₹4,000 on the buy day, you are charged only 2.5% of the amount invested + GST (18% on fees) and if you are investing an amount greater than or equal to ₹4000 it is 100 + GST (18% on fees).

2. Charges while selling:
   Selling a smallcase is similar to selling the stocks in it. There are no particular charges while selling a Smallcase - only the STCG/LTCG taxes. Since smallcases are nothing but baskets of stocks bought & managed together, The taxation guidelines that apply for stocks apply for smallcases as you’re eventually holding them in single stocks format.

   1. Short Term Capital Gains (STCG) - Stocks sold less than 12 months of holding period would be taxed at 15% of the gains. Not applicable on losses.

   2. Long Term Capital Gains (LTCG) - Stocks sold more than 12 months of holding period with a gain of over Rs.1,00,000 would be taxed at 10% of the gains. If the gain amount is less than Rs.1 Lakh, then no amount is taxed.
      If we get dividents, then the taxes on divided are applicable here as well.

3. Rebalancing Charges:
   Smallcase will not charge you for rebalancing. But in realterms, it is selling of certain stocks from the portfolio and buying certain other stocks. So there will be some charges like brokerage charges (by the stock broker).