Former mutual fund managers and stock gurus on Dalal Street are increasingly offering their advisory services on fintech platforms such as Smallcase. Previously, such individuals were restricted to portfolio management services (PMS) and alternative investment funds (AIFs)—products that are confined to wealthy investors.
Prominent names launching portfolios on Smallcase include Sunil Singhania, founder, Abbakus Asset Manager LLP; Pankaj Murarka, founder, Renaissance Investment Managers; and Shankar Sharma, vice chairman and joint managing director, First Global. Singhania was chief investment officer (CIO), equities, at Reliance Mutual Fund (now Nippon India Mutual Fund). Murarka was head of equities at Axis Mutual Fund till 2016.
“We will initially launch a portfolio focusing on large- and mid-cap stocks on Smallcase,” said Singhania, while declining to reveal the fee structure for the advisory.
Murarka’s Renaissance plans to offer multiple strategies to investors. These include a ‘high quality bluechip portfolio’, a ‘core and satellite’ strategy that will split the corpus between long- and short-term bets, and a dynamic thematic portfolio that will rotate towards sectors and themes that are expected to do well. Renaissance will typically have 15-20 stocks in each portfolio.
Sharma plans to offer a portfolio based on quant/artificial intelligence. “We already have an in-house product like this called self drive portfolio baskets for the past 1.5 years, and it has done phenomenally well for small investors. Hence, the decision to broaden the audience via Smallcase,” he said.
Advisory portfolios on Smallcase are typically launched under a Sebi-registered investment adviser (RIA) licence which allows advisers to charge fees up to 2.5% of the assets.
This is only slightly higher than the 2.25% cap on expense ratios in equity mutual funds. However, these portfolios suffer from a tax disadvantage.
Investors in advised portfolios pay tax whenever profits are booked, unlike mutual funds where tax is paid only while redeeming units in the fund. However, market gurus argue that advisory portfolios allow investors to directly own stocks and be informed about each portfolio change. Such portfolios are also not subject to Sebi rules on diversification or market cap restrictions.
“Mutual funds have become straightjacketed by regulations. Investors want a sense of ownership of the underlying stocks. They want a direct connect with the fund manager, which advisory portfolios provide,” said Sharma.
In Smallcase, the investor must approve each portfolio change recommended by the adviser, typically done online.
Experts in the wealth management industry remain sceptical. “I’m not yet convinced by the case to invest in these advisory portfolios. First of all, every time the portfolio is rebalanced, you have to pay brokerage and tax. Second, the investor may not be able to do the rebalancing at the exact same time as the adviser and hence he or she might get different prices for the new stocks. Hence, like PMS, a gap emerges between the returns of the model portfolio shown by the adviser and the actual portfolio of the investor. Also there will be a ‘race to the bottom’ here. Some advisers may invest in highly risky small-cap stocks or run highly concentrated portfolios to attract investors with scant regard for risk management,” said Vijai Mantri, co-founder and chief investment strategist, JRL Money.
For strong believers in stock market gurus’ skills, however, Smallcase offers an additional avenue for availing their services at a low ticket size.