An informed investor is one who invests his/her money in a well-diversified portfolio of stocks instead of concentrating on just one or two stocks. However, investors often forget this strategy and do either of the following:
1. They bet big on 1-2 stocks only.
- They keep on adding stocks to their portfolios indiscriminately.
In both the cases, it is unlikely that the investors would be able to beat market returns.
Hence, to ensure that your portfolio returns beat broad market returns with relatively lower risk, it is advisable to invest in a basket of stocks that are designed by experts.
Smallcase, is one such solution, which offers a curated stock portfolio.
What is a smallcase?
A smallcase is a basket of stocks designed by Securities & Exchange Board of India (SEBI) registered investment advisors (RIAs). A smallcase is a portfolio that is built around a certain theme or based on predefined rules or investment philosophies. A smallcase identifies a central idea and then figures out stocks which can benefit from it. For example, these ideas could include Indian companies that may benefit from the implementation of the goods & services tax or Indian companies that will play a major role in the electric vehicle (EV) segment.
In smallcase, themes are created using quantitative filters as well. For example, growth stocks with no debt on the balance sheet or companies whose share price is trending up. The RIA carefully selects stocks that match a theme. Then weights are assigned to each one of those stocks. Such a well-thought out stock basket is made available to investors.
Since smallcase has tied up with stock brokers, investors can access them through their broking account. They can also purchase smallcases, execute investment orders and later rebalance them from time to time. A smallcase curator updates the stock portfolio from time to time. If a stock within the portfolio has gone up too fast or a stock does not fit an investment theme then the RIA advises investors to sell it. Sometimes, they identify a new company that fits the bill. Such a stock is added by rebalancing the smallcase. Investors who subscribe to smallcase get these updates and can execute them with the click of a button. They can also change a portfolio (selling outgoing stocks and buying incoming stocks) by easily placing orders on the stock exchange through a broking account.
Many investors find similarities between smallcase and mutual funds since portfolios of smallcase are created by experts. However, they are not the same.
Differences between smallcases and mutual funds
Order
You need a trading and demat account to invest in smallcase. A smallcase can be accessed through your broking account. It provides a one-click order placement process. Investing in mutual funds, however, does not require one to open a demat account. You can purchase mutual funds from a mutual fund distributor or from a mutual fund house directly.
Units v/s shares
When you invest in a smallcase, you get securities in your demat account. So, when you are buying the EV smallcase, you are going to buy shares of companies which are working in the EV ecosystem.
On the other hand, mutual fund schemes invest in shares, bonds or gold depending on an investment mandate and you are allotted units of the scheme. When you invest in smallcase, corporate actions benefits such as dividend payouts, rights entitlements and bonus shares are received by you. However, with mutual fund investments, corporate actions are received by the scheme and the NAV of a scheme reflects such receipts.
Ticket size
You can start your mutual fund investment journey with as little as ₹100. However, with a smallcase, the minimum amount varies based on the smallcase you pick. In some cases, it is as low as ₹300, but in some cases, it goes beyond ₹2 lakh.
Comparison
Mutual fund industry has some clear parameters of comparison, which help gauge the performance of schemes in a category. SEBI had announced guidelines regarding categorisation of mutual funds in October 2017. This led to fairly clear scheme categories. There are many thematic funds focusing on various themes where apple-to-apple comparison is not possible. But in most other cases, given the clarity on asset allocation and risk profile of a scheme, investors can compare them with each other. This leads to a more informed decision making by investors.
Since smallcase is all about thematic investing, comparison with one another becomes difficult. Every theme differs from another. Even if two experts design a smallcase on similar themes, they are likely to have different approaches to doing that: one may focus on large-cap stocks while the other may be market-cap agnostic. Further, one may want to pick only 7-10 stocks in a smallcase, whereas the other may opt for a larger number of stocks.
Diversification
A smallcase is a basket of stocks focusing on a theme. In most cases, these are concentrated portfolios. This means that investors are taking extra risk compared to a diversified portfolio. To ensure diversification, investors can buy multiple smallcases unrelated to each other. This may cut down risks associated with concentrated portfolios in each of the smallcases. But this requires investors to understand each of these themes and risk-reward associated with them. Investors have to also keep a track of all rebalancing actions and act on it.
While investing in mutual fund schemes, investors have a choice of investing in a diversified portfolio or investing in a concentrated portfolio. A multicap fund can offer a well-diversified, dynamically managed portfolio to an investor. And an investor can also buy a sectoral or thematic fund if he/she is keen on one. A focused fund can give an investors exposure to several high-conviction ideas of a fund manager. Thus, mutual funds may offer a better opportunity for diversification to investors.
Time
When you are investing through smallcase, you have to select a smallcase that suits your investment goals. Though there is one-click execution, you have to keep track of the changes and execute them from time to time. This requires some involvement. Hence, you have to invest some time for this investment activity.
In mutual funds, the fund manager decides everything for you. Once you make your investment or opt for an SIP, then the rest of the investment decisions are taken by the fund manager. An SIP puts you on an auto-pilot mode in your investment journey.
Fees
Mutual fund investors pay for the professional skills of a fund manager through the expense ratio of a scheme. The expense ratio can be as high as 3%. If you are investing in a scheme with a large corpus or in index funds, then the expense ratio is low. Some of the exchange traded funds tracking the Nifty 50 index charge as low as five basis points (0.05%) as expense ratio. Expense ratio of a mutual fund is regulated by SEBI.
A smallcase, on the other hand, charges fees in various ways. Some smallcases are available for free, while some charge a nominal one-time fee based on the broker. A few smallcases may charge a percentage of the money invested in addition to goods and services tax (GST) at 18% on the fee and brokerage.
Conclusion
While mutual funds may appear attractive and hassle-free, they are ideal for someone just starting out on their investment journey. But as one matures as an investor and wants to explore more focused investment ideas, then a smallcase makes more sense. A smallcase can also be used along with mutual funds, especially when certain themes or strategies are not offered by a particular mutual fund.
As with any investment decision, it is important to carefully consider all pros and cons before investing and decide which option suits your goals.