Smallcase – A Review

Lately, there has been some buzz about ‘Smallcase’, an investment product offered by Zerodha and other brokerages.

Many of our students have reached out and asked whether Smallcase is a Good investment product. 

In this guide, we will breakdown Smallcase step-by-step and understand the product inside-out. 

So, Let’s start 

What is Smallcase? 

A Small Case is a pre-selected basket of stocks that reflects an 

  1. Idea
  2. Theme 
  3. strategy. 

Each of these baskets have stocks that are carefully selected by Experts. 

Let’s take a look at a short video explaining What a Smallcase is : 

And another one ANSWERING FAQ’S (Hindi)

Essentially, Smallcase is a modern Investment product that allows you to invest in baskets of pre-selected stocks, chosen on the basis of an idea, theme or strategy. 

Example 1 : 

Smallcase - A Review 2

Example 2 : Idea based smallcase 

Smallcase - A Review 3

Example 3 : Strategy based Smallcases 

Smallcase - A Review 4

Mutual funds Vs. Smallcase 

The most obvious questions that comes to mind is : How do Smallcases compare with Mutual funds (Active and Passive) ?

On a comparative basis, a smallcase is similar to an Active Mutual fund but with some differences. 

Whether these “Differences” are actually worth choosing smallcase over a mutual fund is actually what an investor should be curious to know. 

And we will get to that answer eventually, but first….

What makes a smallcase different (vs. Mutual Funds) ?

On its own website, Smallcase has a blog post (confidently) titled – 10 reasons why Smallcase is behtar than Mutual funds 

We will analyse each reason provided one-by-one

To make things simple, we have added two sections for each point :

  1. What they say (about themselves)
  2. What we think (about what they say about themselves)

1. Lower cost of Investment 

What they say : Smallcase mentions that the average Mutual fund charges 1.5% (Direct option) as fees, whereas a Smallcase charges only 0.4% in brokerage charges. Therefore, Smallcase is a lower cost investment than an active Mutual fund. 

What we think : Firstly, according to us, ‘Passive’ Mutual funds (I.e – Index Funds), which charge as low as 0.10 – 0.15% in fees are far more superior than ‘active’ Mutual funds.

Active Mutual funds on average cannot beat their benchmark (I.e – Nifty, Junior Nifty etc) indices as explained in our 4 part video series given below :

Smallcase has an ‘active composition’ so it is very similar to Active Mutual funds EXCEPT that Smallcase charges only brokerage (0.40%*) and that too only when Stocks are bought or sold as opposed to Expense ratio charged by Active Mutual funds on entire Invested Amount. 

*More on this below.

Its true that if we compare only Small Case Vs. Active Mutual funds, smallcase fee will generally tend to be lower

However, as an investor, I have the option of comparing ALL Investment options that are available to me. 

There is NO need for an investor to only compare Small Case Vs. Active Mutual fund, the comparison must be made with Index funds too. 

And when it comes to Index Funds (0.10%) Vs. Smallcase (0.4%) Vs. Active Mutual funds (1.2%), Index funds have the lowest fee. 

BUT, Is Smallcase Fee really 0.40%?

Smallcase assumes that in 1 year, its portfolio churns 100%.

This means that if you invested Rs. 1 Lac, the entire Rs. 1 Lac investment was sold and then used to buy Rs. 1 Lac worth of shares again.

So, In the First year, 3 transactions will happen typically.

Invest Rs. 1 Lac – 0.40% Charged

Sell Rs. 1 Lac – 0.40% Charged

Buy Rs. 1 Lac – 0.40 Charged

For Simplicity, let’s assume the value of Investments remains exactly the same at year end as it was in the beginning.

In that Case…

Total Brokerage paid in Year 1 = 0.4% + 0.4% + 0.4% = 1.2%

Of course, this would depend on how much churn there is so charges may not be as high as 1.2% in all smallcase portfolios but on average the charges are going to be much higher than 0.4%.

Another thing to note about Smallcases is that they are offered by Brokerages such as Zerodha, HDFC Securities, Kotak securities, Axis Direct, 5 Paisa etc.


A. Smallcase is offered by brokerage houses. These brokers themselves decide which stock to buy/sell & how much to buy & sell (based on the smallcase’s idea, theme or strategy obviously). Higher the number transactions, the higher these brokerages earn.

B. Unlike Active Mutual funds, where charges cannot exceed 1.2% Average (Direct option), there is no upper limit on the brokerage that can be charged.


A + B = The Brokers’ incentive to earn a fee (brokerage) is NOT aligned with the Investors desire to earn market beating returns (and if earning more than than the market isn’t your desire, why smallcase anyway?)

Will reputable brokerages such as Zerodha, HDFC, Kotak etc abuse this privilege?

Will they get greedy and churn smallcase portfolios to earn higher fee?

We don’t know. We hope not.

still, the Point remains.

Smallcases are active in composition —- Active Mutual funds don’t beat the market—– Smallcase fee is unlikely to be as low as 0.4% —- and it’s likelyhood of beating the market over the long run is, well, unlikely —- Index funds charge much lower fee (0.10%) compared to both Smallcases & Active Mutual funds and beat most actively managed portfolios.

Therefore, As far as choosing where to invest is concerned, we humbly believe that Index funds are the best option with the lowest fee.

2. Flexible & Transparent Portfolio 

What they say : Smallcase allows you to add/remove stocks in the portfolio, something that Mutual funds do not offer. 

Also, Mutual funds declare their portfolios once every month, whereas a smallcase portfolio is open and transparent. 

What we think : If an investor really does have the skill to add or remove stocks from a portfolio, why do it in a smallcase? Why not manage your own portfolio? 

As for transparency, we fail to understand why transparency is important in this context. If a MF is beating the market (which most don’t) why do you need it to be transparent? The whole idea of a MF is to give your money to professionals who dedicate most of their day to finding quality businesses. 

The objective of investing in a Mutual fund (or any investment product) is to earn market beating returns returns, at least that is the only argument that would justify the existence of active Mutual funds and Smallcases. What difference does it make that the Mutual fund declares its portfolio once every month?

3. Always True to Mandate 

What they say : Smallcase claims that MF often do not adhere to their investment mandate. In the past, for example, MF have added small cap stocks in a ‘large cap’ fund in the search for better returns. 

Smallcase will always be ‘true to its mandate’, they claim. 

What we think : It’s true that in the past, MF have misled investors by adding small cap stocks in large cap funds in order to get better returns. However, In October 2017, SEBI came out with a circular that decluttered the MF industry in a big way by defining the 10 categories of Equity Mutual funds. 

Therefore, as far as being ‘true to mandate’ is concerned, we would not necessarily consider smallcase to be very superior to MF’s.

4. Ownership of Shares 

What they say : Smallcase states that owning shares in your demat account is preferable to holding mutual fund units because : 

Dividends from Stocks are NOT taxed, the blog states. 

And Dividends from Mutual funds are taxed. 

Therefore, when you buy a smallcase and you hold shares in your demat, you save tax. 

What we think : The statements made in the blog are factually incorrect because Dividends from stocks ARE taxed

Investors are paid dividends after the company has deducted the Dividend Distribution tax.

When Dividend Income from Stocks is more than 10 Lacs, an additional 10% flat-rate is payable by the individual on Dividend amount over and above Rs. 10 Lacs (Section 115BBDA). 

But, Dividends from Equity Mutual funds are NOT taxed in the hands of the investors because they have already gone through 2 rounds of taxation : 

  1. When Company pays Dividend to MF after DDT
  2. When Company pays Dividend to Investor after DDT 

So, in the case of Equity Mutual funds IF investor chooses a Dividend plan, he is indirectly taxed twice before receiving the dividend. 

This Double taxation scenario can be avoided by simply choosing ‘Growth option’ and when in need of cash, simply redeem his MF units. 

The bottomline is that ownership of shares can have a minor advantage. 

5. Quick Redemption 

What they say : Stocks in the small case can be sold and redeemed quickly. 

What we think : It’s true that stocks can be sold and the equivalent amount redeemed into your bank account much faster than Mutual funds, which usually take T+3 days. 

6. High AUM doesn’t hurt Investments 

What they say : Mutual funds with higher AUM find it difficult to deploy cash since as AUM increases, bigger investments are needed in order for them to have any impact on the overall portfolio. Therefore, higher AUM is a hindrance. Since AUM is not a concern with Smallcase, it makes them better. 

What we think : Higher AUM is a hindrance generally but how do you define ‘High AUM’? Is it 500 Cr? Is it 5000 Cr? 

Secondly, how much impact will a high AUM fund have on the fund’s performance?

This list of Top 5 Mutual funds shows that out of these 5 funds, 4 have AUM of over 6000 Cr. 

If the Top 5 Mutual funds with Average AUM of Rs. 6000 Cr don’t feel the high AUM blues, it would be hard to say when this becomes a problem.

7. Easier to Understand 

What they say : Mutual funds are harder to understand. There are so many equity mutual fund schemes etc which makes it harder for investors to make decisions. 

What we think : It is true that until recently there were many many schemes by the same fund with the same investment mandate and it may have been very confusing for investors to choose one MF over the other, however, this has changed after the October 2017 ruling by SEBI. 

There are now only 10 types of Equity Mutual funds in India and ‘understanding’ them is not a challenge.

8. No Cash Holdings

What they say : Mutual funds often hold cash, which is limited to no more than 15% of the Total Assets under Management. This impacts performance of the fund. With Smallcase there is no cash holding and all the deployed capital goes directly towards owning shares in the smallcase. 

Therefore, Smallcase is better. 

What we think : Holding cash does impact the performance of the fund IF the cash is not deployed at the right time. Often, holding cash is actually considered to be a wise decision.

Warren Buffett’s Berkshire Hathaway holds $128 Billion in cash when the Total Market capitalisation of Berkshire Hathaway is $552 Billion. That is 23% of the Total Market value of the company. This is not the first time Berkshire has been holding a significant percentage of its Total market value in cash and Warren justifies it by saying that unless there is something reasonably priced they will NOT invest their surplus even if it means earning lower returns on the cash. 

Holding cash is not ALWAYS a bad decision, and just because all your money is invested doesn’t ALWAYS mean it’s better. 

Although IF an active Mutual fund is holding cash for a long period, it is unfair to investors since expense ratio is being charged on the cash holdings which should’ve been ideally invested.

At the same time, holding cash is not ideal for Mutual funds either since it increases the chances of earning sub-par returns.

9. Aligning Investments to Ideas

What they say : Equity Mutual funds invest according to investment approaches, sectors, Market cap etc. 

“A smallcase allows you to invest in themes that are based on strong ideas. GST, affordable housing, electric mobility, etc are all ideas and themes that make a strong investment case”

What we think : Smallcase Product is well packaged. And investing in themes such as ‘Affordable housing’ and ‘Electric mobility’ sounds interesting. To that effect Smallcase has done a god job, however, whether this packaging in itself ensures or even increases odds of earning market beating returns is questionable. 

Investing in particular themes and ideas sounds great but it can also leave you exposed to a single idea of theme which can severely impact your portfolio if it doesn’t work out since all your eggs are in the same basket. 

Choosing a well-diversified (across sectors) smallcase may help to protect the investor from losses in a particular sector, but then so can choosing a well-diversified mutual fund portfolio (A Multi-cap fund) or even better…A Nifty 500 Index fund.

10. Higher Returns  

What they say : This brings us to the most important and least understood topic related to investing – Returns

Since Smallcase usually has no more than 20 stocks, the blog claims that they are ‘optimized for Returns’. 

The Smallcase blog also posted this table that showcases Smallcases in all their glory. 

Smallcase - A Review 5

What we think : 

There are a couple points to keep in mind about the Returns table given above : 

  1. Smallcase Returns do NOT include Transaction Fees and other related expenses. 
  2. Smallcase Returns are calculated by ‘backtesting. This means that stocks are first selected based on certain strategies/filters and then ‘backtested’ to see if the stock picks have performed well over recent history. It is not the other around (Smallcase claims), where only those stocks are selected that show favorable historical returns.
  3. While there is no source to verify the returns that Smallcase is claiming, in the future it plans to make historical composition public. Until then, you can get historical composition on a need-to-need basis on request.

If you’d like to see a Review of Smallcase by an actual Investor, you may read this Quora post. 

We also recommend that you read the answers by Smallcase team that explain some of the points raised by the Smallcase Investor in the Quora post above.

Another thing I noticed is that ALL (Yes, ALL) of the Smallcases are showing positive returns since Inception. Checkout this Quick Video :

This is just NOT possible. 

What is potentially happening here is very similar to What Mutual funds did for a long time. Each AMC would open multiple funds in a category (which were poorly defined until October 2017) and the poor performing funds kept being closed or merged into the good performing ones.  

Conclusion : 

  • Smallcase is a Well packaged and Well presented Investment product that is MORE Interesting than standard Mutual funds. 
  • No facts indicate that it has the ability to earn Market beating returns over the long term. 
  • Its current Returns and performance is questionable, although we are sure a few smallcases are doing exceptionally well. 
  • We find the fact that every Smallcase displayed on the Smallcase website  has given a positive return questionable. 
  • If picking your own stocks is the value add, why does an Investor need a smallcase? Why not just invest in Individual stocks? 
  •  Smallcase can be used as a filter to find quality picks, which can then be bought through personal Trading account instead of buying an entire Smallcase portfolio.
  • Personally, we conclude based on facts and reasoning given in this article above (especially point 1) that there is no particular reason to invest through Smallcase. However, each investor must make their own decision. 


  1. The writer works with Mr. Varun Malhotra and EIFS.
  2. EIFS is an education company. We are not an Investment advisory and therefore, no statements made in the article above or on this website in any form should be construed as investment advice. please consult your financial advisor before making financial decisions.

8 comments on “Smallcase – A Review”

  1. Impressed with non biased and transparent views.

    1. Thank you Sir

  2. Devankar malik says:

    The higher returns could either be because of rebalancing feature that it offers to sell the non performing asset and add other good stocks or if the stock is good smallcase sometimes average it

  3. Great analysis ,had it not been these points worth considering ,i could have invested in small case long back

  4. Harshil Panjwani says:

    It’s so clear and crisp . What I wanted to know .

    1. Thank you sir, feel free to share 🙂

  5. Superb analysis,and what fraud is this backtesting??? Tracking since the smallcase wasn’t even launched

  6. vicky pamnani says:

    ///The analysis is good. I have two suggestions – With an active job and other responsibilities, it is difficult to go through these detailed reports so it would be good to have these in Video format like the FLAP/FLIP videos to save time and ease of use. Many of these terminologies are new (though the link is provided but those are also big content to read) to even FLIP members so it would be good to cover these in video and explain them. But Once again thanks for these insights.

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