"We want to make investing as easy as booking a cab," says Vasanth Kamath, Founder and CEO of smallcase, a Bengaluru-based startup that is paving the way for modern investors allowing them to choose from professionally tailored baskets of stocks that reflect an investing idea or strategy.
Currently, seven brokers have a collaboration with the company and are offering this platform. They include Kotak Securities, HDFC Securities, 5paisa, Edelweiss, Zerodha, Alice Blue and Axis Securities.
Kamath tells us about the company and products on offer in an interview with Moneycontrol's Suyash Maheshwari.
Q: You, along with other founders, are IIT Kharagpur graduates. What prompted you to launch an equity investing platform?
A: Rohan, Anugrah and I attended IIT Kharagpur between 2008 and 2012. After graduating, Rohan joined Goldman Sachs, while Anugrah joined Nomura. Anugrah and I had done masters in Economics and had a strong inclination towards finance/capital markets.
Over time, we realised that our friends who weren't working in the financial services were invested in savings accounts and FDs and did not have exposure to equities and capital markets.
Hence, it made sense to build a very simple and comprehensible way to take exposure to themes playing out in the markets, and that's how the idea for smallcase was born.
Q: smallcase is one of the few thematic investing platforms in India. Why do you think theme-based portfolios will work in the country?
A: While we started with thematic portfolios, we have now diversified the product mix including asset allocation, smart beta, model-based and sectoral strategies.
I think it is important for every investor to build a long-term portfolio which is diversified and cost-efficient. Smallcases helps you take a core-satellite approach to do the same.
Q: You are currently collaborating with seven brokerages and act largely as an intermediary between them and investors. So where exactly do you provide value to the brokerages, and why do they need something like smallcase?
A: By working with us, brokerages can offer investors an investment product that has the liquidity of stocks, and are diversified and managed by professionals (like MFs).
Our broker partners also have model portfolios. However, the format of dissemination is excel/emails and conversions have been low.
smallcase enables their research teams to create and manage their model portfolios as smallcases, so it's very convenient for their clients to invest and rebalance their portfolio.
As a neutral player, we can offer more value to retail investors as well as our broker partners and smallcase publishers.
Q: What is smallcase doing to tackle the volatility that exists in the equity market?
A: We have a diverse product mix with asset allocation strategies like All-Weather (offers exposure to equity, gold and fixed income via ETFs), Smart Beta (largecap stocks oriented).
There also are smallcases for different risk levels to build a diversified portfolio.
We recently introduced a way for investors to set up SIPs starting from Rs 5,000.
Q: How does smallcase help retail investors?
A: Smallcases are beneficial for three kinds of investors
-Stock investors: Helps them take a portfolio approach in a simpler manner and gives them a universe of new ideas, strategies managed by professionals.
-Mutual Fund investors: Helps them take portfolio exposure while being managed by a strategy. Other than ELSS, there is an equivalent smallcase for every type of mutual fund.
With smallcases, investors
- know what they hold
- can tweak the constituents at wish
- only pay during transacting (versus fees deducted from their investment each day in expense ratios in case of MFs).
-New Investors: A good introduction to markets as smallcase is simpler and less risky.
Q: What is the strategy going forward and what are you doing to gain millennial traction?
A: Going forward, we would like to build an ecosystem around smallcases. We have the largest brokerages offering smallcases to their clients.
We are now working on enabling advisory platforms, wealth managers to advise on smallcases as they do with mutual funds.
The average age of our investors on smallcase is 28. Millennials usually challenge the status quo and think first principles, making our job easier to convince them to get started with smallcases.
Our focus is to continue developing beautiful, easy products for millennials. So an investing experience for them is similar to booking a cab or shopping online.
We are also working towards building a brand that is relatable to millennials.
Q: It is said that services get costlier with more diversification into stocks, compared to mutual funds, where the costs are capped. Your comments.
A: With smallcase, investors pay only during the time and on the amount of transaction and not the entire portfolio.
Assuming the standard brokerage is 0.3 percent, if you invest Rs 10 lakh, you'll pay Rs 3,000 in brokerage the day you invest.
If the portfolio is rebalanced and has a turnover of 50 percent, then that is another 0.3 percent of Rs 5 lakh, i.e. Rs 1,500, bringing the total cost to Rs 4,500.
Understandably, the lesser one transacts, the lower the absolute costs will be here.
In case of mutual funds, you will be paying 1-2 percent (Rs 10,000-20,000 each year), irrespective of how often you transact.
It's true that the costs are capped on a percentage basis, but it becomes quite costly when investing large amounts in mutual funds.
Moreover, the structure of mutual funds also means that when investors sell out of the fund, it is the remaining investors who bear the brunt of the additional transaction costs incurred due to redemptions - this makes them quite inefficient for long-term and buy-hold type of investors.
Finally, transaction costs are inescapable. But while they are possibly the main cost associated with smallcases, they are only one of the many costs associated with mutual funds.
The financial innovation inherent with smallcases helps strip the other associated costs, making them a lot more cost effective.
Q: Mutual funds are safeguarded for retail investors and regulated, whereas smallcase needs an investor to be well-informed. Why should investors not opt for MFs instead?
A: Both MFs and smallcases are instruments that help investors take diversified equity exposure. However, the modern MF structure was created in the 1920s, whereas smallcases were launched in 2015.
As a result, smallcases have certain distinct advantages like direct ownership, lower-costs, better transparency and control, as well as more variety.