Smallcase review: What you need to know before investing

Published: May 2, 2019 at 11:22 am

Last Updated on December 29, 2021 at 1:00 pm

Smallcase is a basket of stocks selected by an algorithm based on model, theme, sector or smart beta. In this review, we discuss what you need to know before investing in such an idea. Investing in a basket of stocks is a feature that many brokers have. Smallcase is perhaps the first instance in India where a separate entity is offering such baskets that several brokers can access.

Currently, in addition to Zerodha (which made Smallcase popular), investors with demat accounts in 5paisa, Kotak Sec, HDFC Sec, Edelweiss, Alice Blue and Axis Direct can also access the Smallcase baskets.  Broker access is essential for the investor to track the baskets.

Smallcase investing vs Mutual Funds: Which is better?

Many investors want to compare Smallcase investing with mutual funds and wish to know which is better. As mentioned above each Smallcase basket is based on a particular idea filter. Each quarter, the qualifying stocks would change or their weights in the portfolio would change.

You would then receive an intimation from your broker about this. You can either agree to make changes in your portfolio as per the revised stock basket or ignore it. If you make changes, stocks will be purchased or sold as per the new basket allocation. The associated short term or long term capital gain or loss and brokerage costs will have to borne by the investor.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥

Smallcase review: What you need to know before investing

In the case of a mutual fund, when the fund manager churns the portfolio, the investors do not need to pay tax. Thus brokerage and taxes would eat into smallcase gains continuously. It is simply impossible to say which is better though.

From my interactions with investors,  I find many scared to even rebalance fearing taxes. Therefore, for most investors, this kind of basket investing is unsuitable as they will not stick to quarterly resets. Another reason why a comparison with mutual funds is not possible.

How is each smallcase basket constructed?

There 55 such baskets as on date! These are classified into four categories: Model-based, thematic, sector-tracker, smart beta. Here are a few examples from each category. You can explore all of them here. You will need an account to know the stocks and weights. As explained in the video below, some baskets are based on ETFs too.

Model-based Smallcase

  • R&D Spenders: Companies that spend on research to be future ready. Stocks currently in portfolio (need account to know this): Aravind Ltd, Ajanta Pharma, Ashok Leyland Etc.
  • Zero Debt:  Companies with high earnings growth track record. The current portfolio includes Automotive Axles, Bharti Infratel etc.

Similarly, there are baskets with companies that have increased dividends, consistent dividends, low beta, positive momentum, sustainable earnings etc.

Thematic SmallCase

  • Halal Street: Shariah-compliant companies
  • Rural Demand/Middle class: Companies that will benefit from Rural demand or Middle class (two separate baskets)
  • Housing demand etc.

Sector Tracker

Insurance, pharma, realty, metal, medial sectors.

 Smart Beta

As we have discussed several times before – Are Nifty Smart Beta (strategic) Indices better than the Nifty Next 50 – smart beta stock picking refers to methods that defy the conventional notion of higher risk is necessary for higher reward.  There are three baskets here: Quality (sustainable business), Low volatility and high dividend yield.

The backtest

Each basket shows a backtest of the methodology. For example, this is the screenshot of the Low Volatility Smallcase. According to the return calculation methodology, taxes, brokerage have been excluded. It does not talk about corporate action and dividends.  Investors should understand that taxes can significantly erode the gains shown in the backtest

Smallcase Review: low volatility backtestSmallCase Reviews

The following comments were received on Twitter and Youtube in response to my small case review video (see below).

Sir previously i was investing in smallcase but during quarter rebalance approx 40% stocks changed so its not good idea because as ur investment increase and every quarter 40% change causes a big impact due to taxes. Dr. Satyendra

I have been a smallcase user for more than a year with -25% return. Please look into what you are investing and also look at the risk classification level before investing Kalai

Just want to add a couple of points from my experience. As Pattu sir pointed out here, the charts shown as performance are only the backtest for the current portfolio of stocks. Actually if it is very essential for you to see the historical peformance of the smallcase as an idea itself, you won’t see different cuts ie., if the smallcase has existed for two years, the charts are not going to show you the actual performance over 1Y, 2Y etc w.r.t. say NIFTY. There is only one inception to date metric which can show its actual performance. To add to it, from what I had seen much churn in a portfolio (turnover upto 50% 60% sometimes) that some smallcases represented by ideas like “companies expected to benefit over the next 5 years” don’t make sense at all. Such high turnover also means that the analysing the charts they show don’t make sense if you are looking for a long term solution. Girish

Verdict: Should you use Smallcase?

First the video review:

As an idea, Smallcase is fantastic. However, it will work only if the investor follows it to a tee. For this, they may have to churn the portfolio a bit too much and pay taxes. This is neither desirable not acceptable for many.

If you wish to try this out, please be prepared for the churn and associated costs. Do not start immediately. Watch the change in the portfolio for a few quarters and then decide. If you have a small exposure as an experiment, it will not help your portfolio too much. An alternative is to track a basket of stocks or a smart beta index and start with a few stocks from the top 10 and hold until they fall out of the index (30 or so stocks). Since the index will be rebalanced only twice a year and it may take a while for the top stocks to exit the index, the churn would be significantly lower. However, the discipline involved would be the same.

How to buy your first stock without breaking your head!

Are you using smallcase? What has your experience been?

Do share this article with your friends using the buttons below.

🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 5000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! More than 1,000 investors and advisors use this!
New Tool! => Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
Follow Freefincal on Google News
Follow Freefincal on Google News
Subscribe to the freefincal Youtube Channel. Subscribe button courtesy: Vecteezy.
Subscribe to the freefincal Youtube Channel.
Follow freefincal on WhatsApp Channel
Follow freefincal on WhatsApp
Podcast: Let's Get RICH With PATTU! Every single Indian CAN grow their wealth! 
Listen to the Lets Get Rich with Pattu Podcast
Listen to the Let's Get Rich with Pattu Podcast
You can watch podcast episodes on the OfSpin Media Friends YouTube Channel.
Lets Get RICH With PATTU podcast on YouTube
Let's Get RICH With PATTU podcast on YouTube.
🔥Now Watch Let's Get Rich With Pattu தமிழில் (in Tamil)! 🔥
  • Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
  • Have a question? Subscribe to our newsletter using the form below.
  • Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.

Join over 32,000 readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email!

About The Author

Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free!  One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course!  Increase your income by getting people to pay for your skills! More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!   
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both the boy and girl-version covers of "Chinchu Gets a superpower".
Most investor problems can be traced to a lack of informed decision-making. We made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So, in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it, as well as teaching him several key ideas of decision-making and money management, is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)