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With changing times, new investment options are available for investors. One such opportunity is smallcase. Smallcase is a basket of stocks that invest in a particular idea, theme, or sector. They might sound similar to mutual funds but are quite different. This article covers the smallcases, how do they work, and smallcase vs mutual funds in detail.

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What are Smallcases?

Smallcases are a group of securities that are built on a specific strategy, theme, sector or idea. SEBI registered professionals create and manage smallcases. A smallcase comprises up to 50 stocks that are carefully picked to reflect a strategy. Smallcases focus on a trending market theme or a financial model such as zero debt or risk profiles such as aggressive, conservative or balanced.

Let’s take an example to understand smallcase better. Ms Shravani is optimistic about the pharmaceutical sector and plans to invest in it. She wants to invest across different companies rather than one pharma stock. An alternative to a pharma mutual fund is a Pharma Tracker Smallcase. A Pharma Tracker Smallcase comprises 9 pharma stocks. The Pharma smallcase invests in the Pharmaceutical sector. Therefore, Ms Shravani can invest in this smallcase to diversify her investments. Similarly, various smallcases represent different ideas, strategies, and themes.

Check out: Sectorial / Thematic Mutual Funds

How Smallcases work?

A smallcase is a basket of stocks based on a particular theme, sector or idea. It was introduced by a company named Smallcase, a fintech start-up, in 2015. The idea behind a Smallcase is to give investors access to ready-made portfolios directly instead of mutual funds. The company itself has many smallcases. However, the idea was adopted by other brokers who tied up with the company to offer their own smallcases.

A smallcase is created by SEBI licenced brokers, advisors and analysts using algorithms and quantitative models. The stocks are screened and picked through thorough research and analysis.

To invest in a smallcase, one requires a demat and trading account. Moreover, one can invest in a lump sum or through systematic investments. The minimum investment in a smallcase varies with the stocks in the portfolio. Since investing in a smallcase is similar to trading, brokerage charges and transaction fees are applicable. In addition, one has to pay a nominal registration charge of INR 100-150.

Investors can invest in all the stocks of the smallcase. However, they can also make changes to the portfolio by adding and omitting a few stocks. Moreover, they can also change the weightage given to each stock.

Once the investors invest in a smallcase, the money is debited from their trading account, and the shares are credited to their demat account on the next day. Smallcases have no lock-in period and investors can sell them anytime.

Who should Invest in Smallcases?

To invest in a smallcase, research and knowledge about the markets and companies are essential. Investors who have the knowledge but lack time to sift through the entire universe of stocks can invest in smallcases.

Moreover, investors who prefer to have control over their portfolios can consider investing in smallcases. Investors can follow the smallcases of well-known money managers and can also make changes to their portfolio based on their goals and requirements.

However, the choice of the smallcase, the time of entry and exit is up to the investor. Hence investors who have well-defined goals, have a good understanding of their risk tolerance levels, know their investment horizon and can pick the smallcase that suits them can consider investing in smallcases. Moreover, investors who have the knowledge about market timing and can time their entry and exit from the smallcase can consider investing in smallcases.

What are Mutual Funds?

Mutual funds are an investment product that invests in different financial products such as securities, bonds, debt instruments, and so on. It collects a pool of funds from investors, creates a corpus, and invests in different assets. The investors gain from the professional management of their funds and the capital appreciation over time. The suitability of any mutual fund scheme depends on the investment objective of the investor and the objective of the fund.  

Difference between Smallcase Vs Mutual Fund

Following are the key differences between smallcase vs mutual funds:

ParticularsSmallcaseMutual Funds
Control Over Investment PortfolioBetter control as shares are in the investor’s Demat AccountLeast control as after investment an investor has no control over where the money is invested.
Portfolio DiversificationRestricted diversification with strategy or theme-based investment in stocksHigher diversification depending on the investment objective
Capital RequirementHigher capital required with Rs 5000 as minimum investmentLower capital required with minimum investment as low as Rs 500
Expense RatioVaries as per the subscription and fund house.Low expense ratio ranging between 1% to 2%
Exit LoadSmallcase does not have an exit loadMutual funds have an exit load of 1% if the units are sold before the expiry of 1 year. This might vary depending on the period of holding and type of scheme.
Holding PatternShares are held in Demat account with direct control over holdingsUnits are allocated and not the shares in which the fund has invested. Hence, no holding of these shares.
Return VolatilityLinked to market volatility. Investors must track the performance continuously. Returns are linked to market volatility. However, the fund houses manage the portfolio and aim for capital appreciation. 
RiskHigher risk due to exposure to equity market and lower diversificationLower risk in comparison to small case due to portfolio diversification and professional management
TaxationShort Term and Long term Capital Gain applicable on sale of equity sharesShort Term and Long term Capital Gain applicable depending on the type of scheme- equity vs debt.Section 80C deduction available for ELSS

1. Control Over Investment Portfolio

Smallcase investing gives better control on investments as the shares are in the investor’s Demat Account. Having the shares in the demat account gives the investor the control to time their exit and know exactly where their investments are.

On the other hand, investing through mutual funds doesn’t give the investor control over the investment portfolio. One can select between equity or debt or any theme or sector. In a given mutual fund, the investor will not have control over where the AMC invests the money.

2. Portfolio Diversification

Smallcases invest in a bunch of stocks that follow a strategy, theme, or idea. Therefore, diversification is restricted. Smallcase investments are ideal for investors who want to invest in a particular sector for a short term gain or have the motive to earn a high dividend or have a high growth rate. Hence, these are suitable for active investors.

On the other hand, mutual funds offer a good diversification for small capital investment. A mutual fund can invest in more than 100 companies depending on its investment objective. As a result, it offers good diversification, which can act as a hedge against market crashes or high volatile scenarios.

3. Capital Requirement

Smallcase requires a higher capital for investing in comparison to mutual funds. Since it is like investing directly in shares, one has to buy each unit of them to create a portfolio. Therefore, it requires a higher capital. Some smallcase have an initial investment of INR 5,000, and in such cases invest money in ETFs. However, this is similar to investing in mutual funds. Also, the minimum investment can go up to INR 90,000.

Mutual funds, on the other hand, are suitable for all kinds of investors. The minimum lump sum amount is INR 5,000, and the minimum amount for Systematic Investment Plan (SIP) is INR 500 per month. As a result, small investors can also enjoy the benefits of portfolio diversification.

4. Expense Ratio

The investment houses charges expense ratio which is a fee for their management services. The expense ratio for a smallcase works in a slightly different way. Different cases have different expense ratios. Some smallcases are open to the public, while some are with subscription. Some cases are created by the in-house teams, while some by external analyst companies. Therefore, the charges vary accordingly. For smallcases, one has to separately pay the fees that will be deducted from the trading ledger. The expenses are not part of the investment amount.  Also, the expenses are levied only if one has a discount broker.

On the other hand, mutual funds have a low expense ratio. However, the expense ratio varies across mutual funds. The expense ratio is about 1-2% of the investment amount. With mutual funds, the expense ratio is not paid separately. The amount is automatically deducted from the investment. In other words, the fund houses adjust the expenses in the Net Asset Value (NAV).

5. Exit Load

Smallcase investments do not have any additional exit load charges or have any lock-in period.

Mutual funds, on the other hand, have exit load charges. A fund can charge up to 1-2% as an exit load if an investor sells their investment before the lock-in period. The minimum investment duration for holding a mutual fund can vary between 1 to 5 years.

6. Holding Pattern

Smallcase investments give direct control over the holdings. The shares are held directly in the investor’s demat account, and the dividends are transferred to the bank account. Also, in case a particular stock isn’t performing well, the investor can sell those shares and continue to hold the remaining part of the smallcase.

On the other hand, investing in mutual funds will allot the investor units of the fund and not the separate stocks in which it invests. As a result, the investor cannot make adjustments to their investment portfolio. Furthermore, the calculation of returns are on the basis of the value of the mutual fund units.

7. Return Volatility

Equity investments are subject to market volatility. The returns are dependent on the market performance. Also, one cannot be sure of the future returns based on past performance. Most investors who prefer smallcases as an investment option are willing to undertake the market volatility and risk. Also, the investors have an additional responsibility to monitor the market movements constantly and the stocks in their smallcase to manage the risk.

Mutual funds, on the other hand, offer stable returns of 8% to 12%. Investors need not worry about tracking the market and stock movements. Mutual funds have often grown in line with the economy. Furthermore, fund managers constantly alter the holding with the changing market conditions. Also, MFs are hedged with derivatives and gold to manage market crashes.

8. High Risk

Smallcase investments have a much higher risk in comparison to mutual funds. Smallcases are not highly diversified, and the portfolio adopts no hedging strategies. On the other hand, a team of experts manage mutual funds who constantly track the market and adjust the holdings accordingly. Furthermore, mutual fund investments are subject to market risks as well. Therefore, they do not guarantee returns for investors.

Check Out: Highest FD Rates Today

9. Fund Cut off Time

With smallcase investments, investors can utilize dips on an investment day. While in mutual funds, the trading happens before the fund cut off time. The units are computed at the NAV that is announced after the market closes. Furthermore, a mutual fund typically reinvests the dividend. While smallcase investors can control and time the market to earn better returns. 

10. Taxation and Benefits

Taxation of equity mutual funds and smallcase is the same. Capital gains for investments held for less than one year are taxable at a Short Term Capital Gains (STCG) tax rate of 15%. While for the investments with a holding period greater than one year Long Term Capital Gains above INR 1,00,000 are taxable at 10%.

Furthermore, smallcase investments do not attract any tax benefits. While investments in Equity Linked Savings Scheme (ELSS) qualify for tax exemption under Section 80C of the Income Tax Act 1961. Investments up to INR 1,50,000 per financial year qualify for this exemption. 

Explore our article on Mutual Fund Charges

Smallcase Vs Mutual Fund Which is Better?

Smallcases and mutual funds work on a similar ideology. Both invest in a basket of securities to create wealth for investors. However, they differ in terms of how they operate. Mutual funds have higher costs, lock-in periods, low transparency, and investors have less control over the portfolio. Smallcases, on the other hand, have lower fees, no lock-in periods, more transparency, and investors have greater control over the portfolio.

However, investing in smallcases requires knowledge and understanding of the market. Also, investors have to pick their own smallcases based on their objectives and goals. Moreover, the investor has to decide the timing of entry and exit.

Whereas in the case of mutual funds, investors do not require any knowledge of the market. The fund managers will take care of the portfolio and time the entry and exit from the market. All that investors have to do is choose a mutual fund that aligns with their goals and profile.

Though smallcases look better in terms of costs and returns, they come with a prerequisite of market knowledge. And investors who have the requisite knowledge to manage their own portfolio can consider investing in smallcases. Else they are better off investing in mutual funds.

Frequently Asked Questions

Can I Start SIP in Smallcase?

Yes, you can start a SIP in Smallcase. However, the SIP in Smallcase is different from mutual funds. Here the SIP is just a reminder for you to invest on the predetermined date. Unlike mutual funds, the amount will not be automatically deducted from your account and invested in the scheme. You will have to invest your money in the Smallcase.

Can I Stop SIP anytime in Smallcase?

Yes, you can stop your SIP in Smallcase anytime. The alert for the SIP investment will be paused.

Does smallcase charge any fees?

Yes, the smallcase charges a fee. The fee depends highly on the subscription. If the smallcase is public then there might be no fee. If the smallcase is a subscription based then the investor might have to pay a fee. 

Is Smallcase tax free?

No, smallcase is not tax-free. On sale of the shares belonging to the smallcase, capital gain tax is applicable. Since the entire investment is in equity shares, the capital gains are dependent on the holding period of 12 months. If the shares are held for a period of 12 months or more then LTCG is applicable. LTCG or long-term capital gain is exempt upto Rs 1 lakh. Any LTCG over and above Rs 1 lakh is taxable at a rate of 10%. An STCG or short-term capital gain will arise if shares are held for less than 12 months. The STCG is taxed at a rate of 15%.

Can I exit from Smallcase at any time?

Yes, you can exit from Smallcase at any time. There is no lock-in period.

What is the expense ratio of mutual funds?

The expense ratio for mutual funds usually varies between 1% to 2% depending on the type of scheme. A regular scheme charges a higher expense ratio in comparison to a direct plan scheme. 

Is investing in Smallcase is Good?

Smallcases provide lower costs, no lock-in periods, greater transparency, and greater portfolio control to investors. However, buying smallcases requires market knowledge. Although smallcases appear more advantageous in terms of expenses and profits, they require market understanding. And those who possess the necessary skills to manage their own portfolio may consider making a smallcase investment.

What are the disadvantages of smallcase?

The major disadvantage of investing in smallcases is that it requires in-depth knowledge and understanding of the financial market. It also requires a continuous assessment of the portfolio and its performance. Hence, an investor has to possess adequate knowledge and necessary skills along with the time to perform an analysis of the portfolio.

Do mutual funds have a lock-in period?

No, debt, equity, and hybrid mutual funds do not have a lock-in period. You can sell the units of the mutual funds anytime. However, it is recommended to stay invested until your investment objective is met. Furthermore, equity-linked saving schemes have a lock-in period of 3 years. An investor cannot sell the units of an ELSS before the expiry of this lock-in period. 

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