Is Smallcase Rebalance burning a hole in your pocket?


#1

So I have a couple of smallcase and recently I was reading through my account statements for last FY and I realized there is a bug in the smallcase rebalance.

Allow me to explain my finding with an example:-

  1. Consider you have 2 smallcases - smallcase A and smallcase B.

  2. Smallcase A has 10 shares of company X in the portfolio.

  3. During portfolio rebalance of small case A, it advices to sell 5 shares of X.
    You do the rebalance and it sells 5 shares of X.

  4. Now to rebalance smallcase B, it advices you to buy 5 shares of X.
    So you rebalance the smallcase and it buy 5 shares of X at market price (which you were already holding earlier, which you just sold during rebalance of smallcase A, which was bought at much lower price)

  5. In this process you lose on money, you pay for the charges and it is not a profitable transaction as the sale may be eligible for STCG/LTCG.

So smallcase is NOT SMART enough to adjust the shares between small cases in such cases during rebalance. To make it more efficient and profitable for the investor. Forget being efficient, for the sell and buy of shares in rebalance process, Zerodha is making money, but the customer is actually at a loss.

I confirmed the same with smallcase customer support.

This needs to be fixed ASAP since the next rebalance is on 31st May 2018.
Until this bug is fixed, all investors should be careful about rebalancing their smallcase.

Suggestion:
“Rebalance All” should be a feature that identifies if there is a smart adjustment required between the smallcase portfolios. E.g. smallcase A has to sell X shares and smallcase B has to buy X shares, it should just be transferred from from A to B. Instead of sell and buy of shares.
So only the name tagging of those shares change instead of buy and sell.
Also, it should check the buy price of the pre-existing share to not make it a sell at loss. Or rebuying previously owned share at a high price.

CCing the smallcase team members I found upon searching: @vasanthkamath, @Anugrah

@nithin since you have partnered (maybe invested) in smallcase, please look into this matter and intervene if need be because this is causing loss to the investor which is against Zerodha’s values.

Thanks,


#2

Hi Rupesh, thanks for the suggestion. We are constantly working to improve our platform and offer new features. We have already planned this feature, but it might be difficult to do it before the upcoming rebalance. Also, there are no hidden motives here, as we don’t make any money by not implementing this feature. I can assure you with 100% confidence that this feature will be live before the next rebalance - Aug end. Many thanks for the continued support and suggestions.


#3

@Anugrah I understand this is not intentional. We are all in the learning path. Also, had a word with Namrata over chat and told her too that “Rebalance All” could be a growth hacking opportunity for smallcase:-

  • one click to rebalance entire portfolio
  • migration of stocks from one smallcase to another one instead of actual buy/ sell
  • calculating the bought price earlier and current market price and taking decisions

This may sound a bit complicated and technical but using AI, it can be done. You can in fact charge the users a nominal fee (say Rs 50 per usage) for auto “Rebalance All” feature that does the job in one click considering all the different parameters. In my opinion, investors won’t mind paying for such a service instead of doing the task manually. And hence it will increase your business revenue as well.

Best,


#4

Hi Rupesh, slightly off topic here but what I observed is if in some particular smallcases (magic formula, bargain buys) if we do not rebalance for a year then results are actually better.


#5
  1. @Anugrah July end is around the corner.
    So just thought of nudging you to know the status of the ‘Rebalance All’ feature that smartly rebalances by switching the scripts amongst the smallcase, without actual buy/ sell, basis the user’s portfolio. Let us know the progress of the same.

  2. I noticed that smallcase fees are mentioned in the Zerodha Ledger. But one has to manually add the fees paid to calculate the total fee paid to show as expense while filing ITR3 . I have a feature suggestion:-

In the smallcase fee page, https://smallcase.zerodha.com/fees if you show the total fees paid in a Financial year, along with an option to download it as PDF or Excel, it would be easier for tax computation.

What is your say on this?


#6

Any updates?


#7

Any update @Anugrah?
It’s been 6 months and two rebalances since the issue was brought to your kind notice.


#8

Don’t rebalance.


#9

I am not any further. After much research I am getting a sense that Smallcase is not a mature product yet. There are flaws in the basic design of the product. E.g. Intraday trade while rebalancing, rebalance all missing, the benchmark index is Nifty50 for all etc. etc.
Also, the attitude while conceiving smallcase is a trader mentality. Otherwise every 3 months you are buying/ selling. Many a times you are buying again the same script which you had sold 2 quarters back. Such short-sightedness looks like you’re not sure about what you are doing and it is just a speculation business. There are many who have complained that they have lost their capital in the rebalances. The hiccups and volatility of 2018 market has definitely conveyed one thing that smallcase is not a mature product yet and we should take it with a pinch of salt.

Furthermore, I have been patiently waiting for them to respond but it has been 6 months not an official reply on this thread. At least a reply would about the progress would help.

And what I have observed is that all Zerodha products have been made keeping “traders” in mind. May be because @nithin himself is a trader. There is a difference between a trader and an investor like Mukesh Ambani. Maybe Zerodha products cater to traders well maybe. But not a long term investor who does not login every day to check his portfolio.


#10

Hi Rupesh, although I can understand your grim over smallcase, but I personally benefited from this, I have over 4 years of data of smallcases of various theme/strategy base, and I have done a comprehensive research on returns over the last 4 years and astonishingly I found that even we don’t do any rebalancing and keep those stocks for years it may give much better returns. Anyway rebalanceing isn’t a compulsory, it’s just to maintain the philosophy for each quarterly results. Just do little bit experiments with the constituents(stocks) of the smallcase you will get some insights to maximize your profits from them. Good luck.


#11

Then why we purchase smallcase if there is any rebalanced we are believe in smallcase… but now a days market is down but smallcase research not able to save our money


#12

Please understand it is not about whether to rebalance or not. That is upto the individual. It is about the fact that the way smallcase rebalance is designed, it is flawed. It leads to Intra day trading. How stupid it is to buy and sell the same stock which could have been just moved from one smallcase to another i.e mere name-changing would have helped.

To overcome this, rebalance all feature would have helped that would smartly buy/sell/move stocks within portfolio to minimize trades and cost implied.

My discontent with @vasanthkamath and @Anugrah is that after promising in public (read comments above) that it would be done, it hasn’t happened yet and it has been 6 months now which is a long time in the lifetime of a startup. And this premature product is being sold out to Axis Direct, HDFC Securities etc. That’s where I can see greed to sell more and make money rather than correcting the issues to make a better product.

To me it is just a speculation and not an investment. Yes in gambling you win some and you lose some. Maybe it is beneficial for the early adaptors like you and maybe it was all good during the bull run but 2018 has told a different story for smallcase. Just check the YTD returns for the smallcases and compare them with respective index or Mutual Funds. You would get the real story.

I hope you understand my concerns. And I hope team Zerodha and smallcase is listening to resolve the open issues.


#13

Guys, in stock markets you should choose stock based on a strategy. I had long back stated that you should not blindly go with smallcase etc. Form your strategy with some hardwork & that will only give you results. I’ve been personally investing based on ROCE, ROE, sales/profit growth, total returns & market cap to sales ratio. Invest on indications from charts…StochRSI & William %R are really helpful. Fundamental+technical ways of investing can easily get you over 30% IRR pa by booking regular profits.


#14

I can concur with this and not just multiple small cases but even if you have just one.

I invested in CANSLIM about a year ago and every rebalance the index value came down about 5 points. Right now I m sitting at 80, that’s flat 20% loss (In my case it’s about 4L loss).

If I would’ve invested just in NIFTY - would at least be sitting on 6.5% profit for an year - at par with something basic like FD.

Lesson learnt, smallcase is not matured product. Will never touch again.

@Smallcase team, just my 2 cents. No one cares about trivial things like UI upgrade, Android app, smalltalk, multiple bank support etc. Crux of your business is offering selected stocks with strong fundamentals and making sure those stocks are returning in long-term.


#15

My another concern about smallcase as a product is:-

The @smallcase team claims that it is a better product than the Mutual Funds. But the reality is different.

In Mutual Funds, there are AMCs and assigned Funds Managers who get the credit when Mutual Funds outperform the respective indices. And the fund managers take the shun when it does not. People sell their portfolio and move to other fund house when it underperforms. So there is some sense of accountability. Because the more a fund performs, the more people invest in that fund / AMC as their revenue through TER is directly linked with it.

But in case of smallcase, there is no performance attribution. No one knows who is taking the decision to rebalance and on what basis. Who is the fund manager running the show? During the bull run, smallcase team took the credit of performance, but since last 1 year smallcase is not performing, then no one is taking the burn.

Success has many fathers, failure has none.


#16

HAHAHA.

I asked these question to smallcase people from z, they had no answers.

They are no better are marketing small case than MFs. Showing past returns, but have no clue on volatility / DD etc. They dont even publish the performance metrics like MFs.

I don’t understand why anyone would invest in these.

Its better you look at the portfolio of a good MFs and invest in the stocks yourself, if you have the time to manage and dont want to pay the expense for the fund.


#17

But it is also true for all the 4 and 5 star rated funds (smallcap and Midcap), which has lost in the range of 15 to 20%.


#18

It’s even true for the ace investors/Fund managers of Indian’s finest PMSs, they even lost 50% of their portfolio and still smiling. I very well know behind their smile though.


#19

My question is pretty simple brother - who takes responsibility of rebalancing a smallcase and on what basis. A fund manager’s profile and historic performance is in public domain. Is it too much to ask who is managing the smallcase? Whose neck is on the line? All I am asking for is accountability.


#20

In case of a mutual fund, please try to understand the following nuances:-

  1. Mutual Fund:
    If say my YTD loss is 20%, it is still an UNREALISED loss. In fact, I would buy more in dips if I trust the fund manager so when it bounces back, it would be beneficial.

Vs

Smallcase:
If the YTD loss is 20% it includes REALISED loss during rebalances + trading charges. (On a contrary, if at all there is profit, it is short term and is taxed.) If I buy more at the dips in case of loss, I am not sure in next rebalance I have to sell them. I am not sure about what the portfolio would be after next rebalance. Uncertainity it has.

  1. In MF with the TER of 1% or so, i have the flexibility of not booking loss and wait, and still buy at dips while waiting for a bounce back. Also, it gives me opportunity for loss harvesting at my will, if needed to help balance the capital gains somewhere else to save tax.

  2. Furthermore, in smallcase, during rebalance, not only you realise loss, but at the same time you need to put in more money, means more loss. While in Mutual Funds, the loss is only with the money put in so far and that too is unrealised.