Investors savvy enough to pick stocks on their own create an equity portfolio by themselves. The rest prefer to invest in mutual funds. There are also many at intermediate level who do have some understanding of stock-picking but keep waiting for the final plunge. What if they get a ready-made portfolio based on a theme or an idea and instead of buying individual stocks in it, they get to invest in all in few clicks?
This is what fintech start-up Smallcase Technologies and discount brokerages like Samco Securities and Fyers bring to the table. Smallcase has tied up with nine brokerages - HDFC Securities, Zerodha, Kotak Securities, 5Paisa, etc - through which one can invest in various types of 'smallcases', a collection of stocks based on a specific theme. Fyers and Samco Securities have their own thematic investment options.
Smallcase has total 270 'smallcases' such as All Weather Investing, The Great Indian Middle Class, Safe Haven, Electric Mobility and Bargain Buys, etc. Fyers, which launched thematic investments in 2017 and rewired it in 2019 has total six themes - Market Leaders, IT Majors, Consumerism, Banking Magnates, Hamara Bajaj and All Weather ETFs. Samco Securities has 28 'StockBaskets', which include Beginner's Basket, Health and Wellness, India's Wealth Compounders, Dividend Champions and goal-based StockBaskets such as Domestic Education Basket, International Education Basket, Retire in 2040 and International Vacation Basket, etc.
"Theme-based investments are like ready-made playlists. Earlier we used to buy single song of our choice or the entire album even if we liked two or three songs in it. Now you have playlists as per your mood such as rainy day or road trip songs. Smallcase works on the same concept. You don't have to pick individual stocks, but a theme or an idea," says Vasanth Kamath, Founder & CEO of Smallcase Technologies.
How to select a theme
All Weather Investing, the most popular 'smallcase' was down only 3 per cent on March 23 when the benchmark Nifty had crashed 37 per cent. This has returned 11 per cent CAGR since its launch. So, if you are an investor looking to build a portfolio across asset types, this could be a good option as it invests in equities, fixed income and gold. There are other low risk 'smallcases' too for conservative investors. "When a retail investor opens a demat account, they do buy couple of stocks, but do not take a well-diversified portfolio-building approach. That's where Smallcase comes (in). We help them build a portfolio slowly and steadily. So, a beginner who doesn't know what he is doing can invest in All Weather Investing and Smart Beta - Low risk or Smart Beta - Low volatility," says Kamath.
If you already have a portfolio, Smallcase has a feature called 'Portfolio Health' that helps you balance your portfolio across companies, sectors and markets. For example, if your portfolio is tilted towards pharma sector, it will suggest you to offset it by buying All Weather Investing or other sector specific smallcases.
Those who understand what they are doing can take a plunge into high risk or concentrated themes. Tejas Khoday, Co-Founder & CEO at Fyers suggests that based on the preference and risk profile, investors may consider one or more themes for investment. "Market Leaders and Consumerism are preferred choices for passive investors, while active investors prefer higher risk themes like IT Majors, Banking Magnates. All weather ETF is an investment choice of conservative investors."
StockBaskets of Samco Securities have a well-communicated long-term orientation. They charge a fee if you exit a basket before five years. "StockBasket solves two of the most fundamental problems that results in investors not creating wealth - first, it helps investors buy quality stocks - since most investors buy poor-quality penny stocks, they are unable to see the benefits of compounding thus failing to create long-term wealth. Second, it helps investors hold for a long period of time - most investors usually end up holding stocks for less than a year and therefore miss out on large gains," says Umesh Mehta - Research Head, Samco Group.
What are the costs involved
In case of Smallcase and Fyers, a flat fee of Rs 100 is charged for one 'smallcase' or a theme. Besides, brokerage and other statutory fees are applicable for all orders. Rs 100 is also levied when the portfolio gets rebalanced. "To exit, rebalance or modify, the charges are Rs 100 or 2 per cent, whichever is lower," says Khoday.
In case of StockBasket, two types of fees are charged to investors - Research subscription fee and cancellation fee, if exited/cancelled before five years. Other charges such as brokerage and taxes apply when buying and selling. The research subscription differs for various baskets. "If you buy a basket worth Rs 1 lakh then the subscription fee is approx Rs 1,500 per annum or Rs 375 per quarter. This subscription fee remains flat even if the basket value goes to Rs 2 lakh," says Mehta. Also it comes with subscription fee refund guarantee. "We insure that if our investors don't make money, we do not as well."
Choosing between mutual funds and theme investments
The two investment types are entirely different. Mutual funds as per their category capture broader market universe. They are much more diversified having higher number of stocks in a single scheme compared to themes. "A typical mutual fund has investments in close to 50 stocks (barring focussed funds). In comparison, themes have anywhere between 8-12 stocks which are all based on a specific sector, trend or idea. This gives a concentrated and measurable exposure, to make higher returns in the stock markets," says Khoday of Fyers. "Mutual funds are about breadth, while Thematic Investments are about depth."
So far as expenses are concerned, typically active mutual funds have annual expense ratio of up to 2.5 per cent of your investment amount. In case of themes, you have either one-time subscription fee or flat fee each year. However, note that mutual funds do not charge you for rebalancing the portfolio. Every time a 'smallcase' or Fyers' themes are rebalanced, you pay for it. This could be a surprise cost that you may not be able to factor in. In case of StockBasket although rebalancing has no cost, they do have annual subscription fee unlike one-time flat fee structure at Smallcase and Fyers.
How often does rebalancing happen, you wonder? "All themes are reviewed each quarter, post their quarterly financial results announcement. Based on the progress, expectation and upcoming prospects, stocks with possibility of under performance in the long run can be left out from the theme," says Khoday.
Should you invest?
By the concept such themes are indeed innovative and help in building a thematic portfolio. It helps in execution if a registered investment advisor is creating a 'smallcase' for his clients or a savvy investor is actively participating in building and rebalancing his own theme. However, new investors should take it with a pinch of salt. The rebalancing cost is irrespective of whether you make returns or not, although StockBasket will return research subscription fee if the portfolio doesn't make money. Also, these are not a replacement for mutual funds but a method to build a broader portfolio of stocks based on a particular theme by taking direct exposure in equities. You will also have the option to invest in diversified themes or diversify your portfolio by investing in multiple themes. If you are a savvy investor you can give it a try by investing a part of your investment. If you are new to equity investment and have the risk appetite you should take it as a long time learning experience and start with nominal investment.
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