Smallcases on Zerodha

Smallcase is a fintech platform that packages thematic or factor-based equity portfolios (called “smallcases”) for retail investors. Each smallcase is a curated basket of 2 to 50 stocks or ETFs representing a specific investment idea (e.g., rural demand, electric vehicles, banking sector, ESG). Zerodha integrates with smallcase through a technology partnership; smallcase orders are executed through Zerodha’s Kite trading engine. Investors require an active Zerodha account to invest in smallcases through the Zerodha-smallcase integration.

Smallcase Technologies Private Limited, the operator of the smallcase platform, is an investment adviser registered with SEBI under the SEBI (Investment Advisers) Regulations, 2013.

How smallcases work

A smallcase is not a mutual fund. It is a portfolio of individually-owned stocks and ETFs held directly in the investor’s demat account at CDSL. Unlike a mutual fund where investors hold fund units and the AMC holds the underlying stocks, in a smallcase the investor directly owns each constituent stock. Each constituent is held as a separate ISIN in the demat account.

Accessing smallcases on Zerodha

Investors access the smallcase platform through the smallcase.com website or the smallcase mobile app, logging in using their Zerodha account credentials (OAuth integration). They can browse, compare, and invest in smallcases from over 200 smallcase managers (SEBI-registered investment advisers and research analysts).

Investment and basket orders

Investing in a smallcase triggers a basket order through Kite. Each stock in the smallcase is purchased in the proportion specified by the smallcase composition. For example, a smallcase with 20 stocks may place 20 separate CNC buy orders simultaneously.

The minimum investment in a smallcase is determined by the price of the costliest constituent stock multiplied by its weight, ensuring at least one share of each constituent is purchased. Minimum investments range from Rs 3,000 to Rs 1,00,000 depending on the smallcase’s constituents.

Smallcase managers

Smallcase managers are SEBI-registered entities (investment advisers, research analysts, or AMCs) who design and manage smallcases. Prominent managers include:

• Windmill Capital (now part of Axis Securities): Index-tracking smallcases.
• Equitymaster: Value and special situation smallcases.
• Momentum (by DSP): Quant-based momentum smallcases.
• SEBI-registered independent research analysts managing sector or theme smallcases.

Managers set the initial composition and periodically rebalance the smallcase by adding, removing, or changing weights of constituents.

Rebalancing

The key operational event in a smallcase is rebalancing. When a smallcase manager updates the portfolio (typically quarterly or based on defined triggers), all investors receive a rebalance notification. On rebalancing:

• New stocks recommended by the manager are bought.
• Removed stocks are sold (CNC sell orders placed).
• Weight changes trigger proportional buy or sell orders.

Investors can accept or decline rebalances. Accepting a rebalance triggers a basket order through Kite. Declining preserves the investor’s existing holdings without following the manager’s new allocation.

Rebalancing has tax consequences: each sale triggers a capital gains event. Frequent rebalancing in smallcases with STCG positions (held less than 12 months) attracts 15% STCG tax on each rebalance event.

SIP in smallcases

Smallcase supports SIP (Systematic Investment Plan) at monthly or quarterly intervals. The SIP purchases additional units of each constituent at the current market price, maintaining the original portfolio proportions. SIP mandates use the UPI AutoPay (NPCI UPI 2.0) or NACH mechanism similar to mutual fund SIPs.

Charges

Smallcase platform fees

Smallcase charges a subscription or transaction fee depending on the specific smallcase:

• Free smallcases: No platform fee; usually index or large-cap tracking smallcases.
• Subscription-based: Monthly or annual subscription of Rs 500 to Rs 4,000 for premium smallcases.
• Transaction fee: Some smallcases charge per-invest or per-rebalance transaction fee of Rs 100 to Rs 500.

Zerodha does not charge any additional fee for using the smallcase-Zerodha integration beyond the standard Zerodha brokerage (zero for CNC delivery buys and sells).

Zerodha brokerage and charges

All smallcase buy/sell orders execute as CNC delivery orders:

• Brokerage: Zero (delivery trades).
• STT: Applicable on each constituent trade.
• DP charge: Rs 13.5 per ISIN per day on sell (delivery debit from demat).
• Exchange charges, GST, stamp duty: Standard rates.

The DP charge structure means that rebalancing a smallcase with 20 constituents requiring partial sells involves Rs 13.5 × (number of sold constituents) in DP charges per rebalance event.

Tax treatment

Since smallcase holdings are directly owned equities:

• STCG: Gains on holdings sold within 12 months of purchase taxed at 15%.
• LTCG: Gains on holdings sold after 12 months taxed at 10% on gains above Rs 1 lakh.
• Each constituent’s holding period is tracked separately from its individual purchase date, not from the date of the smallcase investment.

Rebalancing-triggered sales may result in STCG even for stocks that have appreciated, if the holding period is less than 12 months. Investors should assess the tax cost of rebalancing for high-turnover smallcases.

Tax harvesting

Some investors use smallcases for deliberate tax-loss harvesting, selling underperforming constituents near year-end to offset gains. This can be executed manually through Kite for individual constituents.

Comparison with mutual funds

References

1. SEBI (Investment Advisers) Regulations, 2013.
2. Income Tax Act, 1961, Sections 111A, 112A.
3. NPCI, UPI AutoPay specification (UPI 2.0).
4. SEBI, Regulatory framework for research analysts offering model portfolios.
5. Smallcase Technologies, Platform terms and fee structure (smallcase.com).