A curated basket of stocks now just a click away

The idea behind a mutual fund is to enable a retail investor to have a portfolio of stocks managed by an expert—but the drawback is that the investor subsequently has no control over the portfolio. Wealth managers also provide portfolio management services, but the minimum investment is ₹50 lakh, which excludes most retail investors like you and me.

The three friends wanted to find a way for regular investors to put money into a portfolio of stocks instead of having to go stock by stock. “So we created smallcase as an instrument for taking exposure in a basket of stocks," says Kamath, co-founder and CEO of smallcase Technologies.

This makes smallcase an alternative to both mutual funds and portfolio management services. A Silicon Valley startup, Motif, founded by Hardeep Walia, has also created this kind of alternative financial tool in the US. Its ‘motifs’ are based on a variety of themes from cleantech and fighting cancer to changing interest rates.

New infra for capital markets

In India, to enable such portfolio-as-a-unit thematic investing required building a platform to plug in multiple entities, including stock exchanges, trading sites, brokers, investors and financial advisors. “It’s new infrastructure for the capital markets," says Kamath, 28, whose family has always traded in the stock market. He recollects spending summer vacations in Mangaluru as an eight-year-old taking calls from clients and punching in orders for his uncle who was a broker. Another family member built Omnesys, whose trading software most brokers use in India. Thomson Reuters acquired the firm in 2013.

Kamath went on to study economics at IIT Kharagpur, and met Shrivastava, 30, his senior who did the Chartered Financial Analyst (CFA) programme while they were in college. After IIT, Kamath joined Tracxn, a Bengaluru-based deal discovery platform for venture capital, while Shrivastava worked for Nomura in Mumbai, where he built portfolios for institutional investors. Around 2014, they began talking about how to enable one-click investment in a portfolio of stocks treated as a unit.

They got together with Gupta, 29, who was working for Goldman Sachs in New York, building low latency trading platforms. The three of them quit their jobs and founded smallcase Technologies in 2015. Initially, it was part of a fintech startup accelerator run by discount trading brokerage Zerodha. They built the back end for investing in a portfolio where the allocation for each stock is automatically calculated based on its weightage. Then, multiple trades for the stocks in the portfolio had to be executed on the stock exchange at one go through a trading site like Zerodha.

Unlike a mutual fund, the smallcase is in the investor’s trading account, so she has full control. One can add or remove a stock from the smallcase or alter allocations, although most people don’t have the bandwidth to track the stocks as closely as is required to do this.

Most investors prefer to pick portfolios made by experts instead of creating their own, although the platform enables an investor to create her own smallcase and invest in it as a unit. To help the majority of investors, the platform has an expert team putting up thematic smallcases, such as one that guards against volatility by investing in both equity and gold.

Apart from the initial investment into the smallcase, the platform enables periodic rebalancing, again with one click. The smallcase creator tweaks the holding from time to time and notifies investors, who then hit the rebalance button to trigger ‘buys’ and ‘sells’ on their trading account. All this happens in real time where stock prices are changing.

Time to expand

Last February, Sequoia Capital India led an $8 million series A round of funding for the startup. There are 50 Sebi-registered financial advisors creating smallcases for investors on the platform. Some are free, others may require a monthly or annual subscription fee and set minimum investment limits. These are typically created by wealth managers who will then track the performance of stocks in the smallcase and rebalance it periodically.

Trading sites other than Zerodha have been enabled on the platform as well, allowing more investors to execute smallcases in their preferred accounts. Apart from Zerodha, Axis Direct, Kotak Securities, HDFC Securities, IIFL Securities, 5paisa, Edelweiss, and Alice Blue are on the platform. This has helped build credibility for the platform, which also earns a fee each time an investor executes a smallcase.

“We had the thesis that this instrument could play out in the Indian market. The idea seemed interesting. But you can never get a sense of how users will react until you put the product in front of them and ask them to commit money to it," says Kamath. “We’re asking people to invest through us. It’s a reputation and trust-driven business."

Zerodha gave smallcase a start, but it was hard to pull in other institutional brokers, who said they would rather build their own smallcases for their investors. “The biggest hurdle was to convince brokers that we were not going after their client base. We wanted to collaborate and build an ecosystem for smallcases," recalls Kamath.

Finally, he was able to show brokers the value of being on a platform where a diverse set of independent financial advisors would be creating smallcases that investors would execute on the broking sites. This essentially expands business for brokers as well as financial advisors, who gain from network effects.

“We think of it as a marketplace to put our offerings up," says Anoop Vijaykumar, fund manager at Capitalmind, whose smallcase has a basket of 25 stocks based on their four-year momentum factor.

The ‘creators’ page lists all the available smallcases. An investor can read about the creator, the thesis behind each smallcase, and see its past performance relative to a benchmark index. This helps a prospective investor, but there’s a downside.

“People are picking investment advisors like they pick mutual funds, where they look at the recent history of returns and decide. That may not be the best way to pick advisors. You may want to pay more attention to their investment philosophy and how they’ve performed over a longer term," explains Vijaykumar.

“It’s a nascent platform, still evolving. The number of advisors is small. A lot more needs to happen in terms of the advisor ecosystem as well as the execution platform. I’m expecting more innovation in this space in the next two years."

Malavika Velayanikal is a consulting editor with Mint. She tweets @vmalu