Using smallcases to Invest Passively in Themes & Ideas

What is the first thing that comes to your mind when you think about passive investing? For me, it’s the tortoise slowly making its way to the finish line in that age-old fable. And also, index funds and ETFs. And I am sure I am not the only one here.

When we think or talk about passive investing, we usually take our attention to index funds and ETFs. These are mutual funds that track a specific index, like the Nifty, or an asset, like gold. When you invest in such an instrument, you participate in the growth of the underlying index or asset. For example, Reliance ETF Nifty BeES tracks the Nifty index while Reliance ETF Gold BeES tracks the price of gold. Index funds and ETFs are as simple as that, which is why they come with lower costs and make for excellent passive investment tools.

However, passive investors shouldn’t limit themselves to just index funds and ETFs. What passive investing essentially means is that you choose a specific investment strategy and invest in it for the long-term. Whatever the strategy might be, when you begin investing in it with the intention of not wavering for a long period of time, what you’re doing is investing passively.

For example, let’s say you invest in a Nifty ETF for the long-term. Here, the strategy you’re adopting is to invest in the 50 largest companies in India. The companies might change, but your strategy doesn’t change. This is how passive investing works.

Hence, passive investing strategies can be of various types. Investing in a gold ETF that tracks the price of gold is also a passive investing strategy. So is investing in different themes like electric mobility, affordable housing, rural demand, etc.

Let’s take the example of electric mobility to understand this further. There is a lot of attention around the electric vehicles ecosystem right now. The government is actively announcing and pushing incentives to help companies manufacture electric vehicles and the infrastructure to use it. At the same time, end users are also given incentives to use electric vehicles. For all of these reasons, it is widely believed that electric vehicles are the future.

Now, suppose you also believe in this and understand that companies that are working in the EV ecosystem will benefit over the long run. Hence, you decide to invest in this theme for the next 10 years. Over the years, the companies you invest in might change, but your belief in the electric mobility theme stays strong enough for you to continue investing in it. This means that you will passively track and invest in this theme.

This is how passive investing can be given a broader example that goes beyond index funds and ETFs. Passive investing can also be diversified across asset classes like equities, gold and fixed income through an All Weather Investing portfolio.

Investing passively in different strategies and themes can seem like a daunting task. Especially when compared to investing passively in the Nifty, where all you have to do is pick an index fund or ETF. However, passive investing in themes is also just as simple with smallcases.

A smallcase is a portfolio of stocks and/or ETFs that is built around a specific idea, theme or strategy. All you have to do is pick a smallcase that follows the theme or idea you believe in.

Coming back to our example of the electric vehicles ecosystem, there’s the Electric Mobility smallcase that can help you passively invest in this theme. This smallcase is rebalanced every quarter to ensure that the stocks in the portfolio are true to the theme.

Similarly, there are a number of other smallcases that you can choose from. And just as passive investments should be, all of them are low-cost investments as well. Most smallcases have just a flat transaction fee.

This is how investors can have a broader take on passive investing and use smallcases to build wealth over the long-term.