Gopal Prabhu, a Bengaluru-based IT professional, is a financially conscious person who started saving for his retirement four years ago. Like many of his generation, the 29-year-old digital native isn’t afraid to experiment with new financial instruments. One such experiment was in 2017 when Prabhu invested in Realty Tracker, an equity investment instrument from tech startup smallcase Technologies. In the same year, he also invested in a mutual fund (MF) offered by one of the top fund houses in the country. In two years, the MF has given Prabhu a 9% return, whereas Realty Tracker has yielded 11%.

“I came across smallcase for the first time when I got a Zerodha [online brokerage] account. It was a new way of investing in equities, which I found to be a little simpler than directly investing in single stocks,” says Prabhu.

smallcase Technologies offers a technology platform where orders for varying quantities of multiple stocks in its investment instruments can be placed at one click. The company calls its products smallcases, which are essentially baskets of stocks or exchange-traded funds (ETFs) picked thematically. For instance, Realty Tracker is built on the theme of real estate developers doing well on the back of the government’s housing schemes and the sector touching $180 billion in value by 2020.

At a time when retail investors are shying away from choppy equity markets, companies like smallcase Technologies could ignite their interest to invest. In essence, smallcases and MFs are similar, but differ in these aspects: First, unlike MFs, which issue units of an underlying portfolio to an investor, shares in smallcases are directly held by the investor, who is free to buy or sell more of the same or different stocks; second, smallcase Technologies does not charge any expense ratio—a percentage of total funds under management which an MF charges to cover expenses.

Therefore, for a like-to-like portfolio of shares, a smallcase is likely to outperform an MF by at least 1.5% (the average expense ratio of MFs). An investor buying into a smallcase need only pay a fee to the broking house through which the shares are bought. Hence, the expense on an investment of ₹1 lakh in a smallcase is ₹250 as against ₹1,500 in an MF.

Saurabh Mukherjea, founder of Marcellus Investment Managers, a portfolio management services firm, says thematic investment in equities like smallcase is a viable option for today’s young professionals, especially if they aren’t convinced about MFs’ fund allocations. “But a lot depends on the basis on which the themes are understood and, consequently, how money is allocated among various stocks,” he says.

These days most young professionals want a say in where their funds are parked. In Prabhu’s case, the MF that Prabhu invested in continued to hold shares of debt-burdened housing finance company DHFL, a major casualty of a liquidity crunch in the non-banking finance companies’ space. In the first week of August, DHFL shares were trading below a tenth of ₹600-₹650 they were trading at a year ago. Prabhu didn’t want his MF to hold on to DHFL but could do nothing about it, as these funds are managed by asset managers. Another smallcase he had invested in too had DHFL, but he could choose to sell the stock since he held it directly via his demat account.

Themes are decided by smallcase Technologies and brokerage firms, and stock picks are vetted by brokerage analysts to minimise risks. “MFs are organised more by sectors, not by themes. So if an investor wants to invest in a bunch of stocks that would benefit from the introduction of the goods and services tax, it is possible through something like a smallcase,” says Rahul Jain, head of personal wealth advisory at Edelweiss Wealth Management, which hosts 20 smallcases on its platform.

Bengaluru-based smallcase Technologies was founded in 2015 by three friends from the Indian Institute of Technology, Kharagpur. Vasanth Kamath, 28, is chief executive officer; Anugrah Shrivastava, 30, head of investment products; and Rohan Gupta, 28, chief technology officer. All three come from backgrounds rich in financial literacy, which came in handy when they were setting up smallcase Technologies. Kamath’s father and mother are avid equity investors: “My parents funded their marriage by pledging their shares of Axis Bank.” Shrivastava worked with Nomura where he designed thematic indices for institutional investors. Gupta worked with Goldman Sachs where he built trading platforms for the U.S. market.

Kamath says the germ of the idea of smallcases came from the trio’s observation that young people do not invest much in stocks, even the well-earning ones. “Most of the money was going into real estate, gold, and fixed deposits,” he says. And investors in MFs believed that these were “a black box where decision-making is delegated to a fund manager without any input from the investors”.

In just three years since the launch of the startup’s first smallcase, about ₹2,100 crore from 360,000 investors has flowed into the equity market through 60 smallcases offered through seven brokerages, including Zerodha, HDFC Securities, Axis Direct, and Edelweiss. Some smallcases were developed with the help of publishers (11 so far)—equity advisers who don’t have brokerage platforms.

So far, smallcase Technologies has raised $8 million from investors, including Sequoia, Blume Ventures, Beenext, WEH Ventures, and was seed-funded with $2 million raised from Blume Ventures and Straddle Capital (which invests the personal wealth of Zerodha founder-CEO, Nithin Kamath).

Nithin (not related to Vasanth) tells Fortune India Zerodha decided to take a bet on smallcase Technologies as the broking firm was looking for ways to break fresh ground. “Around 2016 we realised we were already among the top five brokers in the country and started wondering how to expand the market by educating investors and using a good execution platform,” recalls Nithin. Consequently, Zerodha opened up its application program interface to smallcase Technologies and similar startups that offer niche experiences to investors. “The challenge with most retail investors in India is that they put all their eggs in one basket and when they incur a loss, they turn inactive,” says Nithin. “Apart from the Nifty 50 and Bank Nifty, there really aren’t too many other ETFs in India. What a smallcase offers is a thematically researched quasi-ETF. It has helped bring in a new breed of investors into the market.”

“The thesis behind investing in smallcase is that as equity investing in India matures, a low-cost, tech-enabled, digital-first alternative to MFs will be very successful,” says Harshjit Sethi, principal, Sequoia Capital India.

Apart from regular investors like Prabhu, smallcases are becoming increasingly popular among busy venture capitalists (VCs) to channel their personal wealth into capital markets, Nithin says. Ishan Preet Singh, who until recently was an associate with Lightspeed Ventures, has invested in around six different smallcases. “All my money was earlier in fixed deposits and that isn’t an ideal way to build wealth. But I didn’t have the time to educate myself on markets,” says Singh. “So I tried smallcases and made more money than by directly investing in equities.”

All investors and experts agree that being a fairly new product, the long-term success of smallcase is yet to be determined. But it is surely a viable option, as investors look to park their money across multiple asset classes. Kamath has set smallcase a target of reaching 1 million investors by March 2020. Will smallcase be the next big thing in the world of investing? Time will tell.

(This story was originally published in the October 2019 issue of the magazine.)

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