Investors who invest directly in stocks usually research companies and their growth prospects. And once they shortlist stocks and make a portfolio, they monitor them constantly. So, in a way, direct investors keep complete control over their investments. This could probably be you, as well.
On the other hand, mutual fund investors leave the stock-picking to investment experts. Instead, they give investment control to their fund managers and don’t even own the stocks in which the mutual funds are invested.
Investing through expert-curated portfolios provides a middle ground. It gives the option of owning stocks by investing directly into stocks but under the guidance of an expert portfolio manager. Should you bite the bait?
Let’s understand a curated portfolio
Curated portfolios are a professionally managed basket of stocks or ETFs that reflect a strategy, theme or idea. In a way, they are ready-made portfolios made by investment experts ( generally Sebi-registered professionals).
For instance, the ‘all-weather investing’ of smallcase.com is designed to do well in sound and lousy market times. It invests in three asset classes of equity, debt, and gold asset classes based on an algorithm-based asset allocation strategy.
Similarly, there are portfolios on momentum investing, electric mobility, green energy, digital inclusion and taare zameen par (penny stocks).
How to invest?
Fintech companies like smallcase and Wealthdesk, along with 200-plus investment experts, offer more than 500 curated portfolios. And since they have a tie-up with regular brokers like Zerodha, Upstox, ICICI Direct, HDFC Securities and Kotak securities, you can directly buy stock baskets using their platform.
For instance, when choosing the “green energy” theme, the shortlisted green stocks get credited to your Demat account. And when the expert rebalances the portfolio, you get an alert to do so. You can either rebalance or continue with the existing stock investments.
One of the advantages of choosing a curated portfolio is that you get to invest directly in stocks and ETFs without needing the time or skill to do the required analysis.
Moreover, portfolio choices are galore compared to what an investor would get from a mutual fund.
A curated portfolio falls somewhere between a mutual fund, which offers an opportunity to invest as low as Rs 500 and a Portfolio Management Service (PMS), which is available only for a portfolio size of Rs 50 lakh or more. Moreover, with investment experts, often well-known, involved in the portfolio construction, investors also get an opportunity to benefit from their proficiency.
However, there are set of challenges:
Investment discipline needed
Investors get to know a portfolio’s stocks only after subscribing to a theme or strategy. And the portfolio composition goes through changes over a period of time. So, some stocks keep entering the basket while others exit.
So, while investors are well-advised to rebalance their portfolios to stay in tune with strategy, the onus of executing the transaction rests with the investor.
If she doesn’t rebalance her portfolio as per the advice, there will be a deviation in performance. So, for the idea or theme to potentially benefit an investor, she needs to mimic the basket at all times.
Also, since you buy stocks or ETFs on your own, you have to pay brokerage fees whenever you execute a trade. While some are free-access baskets, others charge recurring fees, which can be a flat fee or a percentage value of the corpus value.
In case of a flat fee, ensure your portfolio value is significant enough to keep the cost lower – in the range of 1-2% annually.
In addition, there are depository and other maintenance charges. Moreover, capital gains taxes are to be paid whenever the stock is sold at a profit unlike that of mutual funds. Also, dividends received from stocks are subject to taxes for investors.
Many investors are lured by the high returns reported by a few of the curated portfolios. However, they must understand the risk profile of the portfolio as well.
Since regulatory constraints don’t govern curated portfolios, as mutual funds are, some might likely take more risk than warranted. Many portfolios are currently holding just five to seven stocks.
Moreover, these portfolios don’t have a long track record of performance. So, it becomes difficult to gauge its consistency in beating benchmarks across market cycles.
What to do?
Differentiated portfolio offerings might seem intuitively appealing. But investments are best kept simple. First-time investors are better off investing in mutual funds since curated portfolios require more understanding of the market.
Hands-on direct equity investors can consider moving part of their portfolio towards a curated portfolio. First, however, they need to do their due diligence to check the credentials of experts and their long-term performance track record.