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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.

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.

Difference between Smallcase Vs Mutual Fund

Following are the key differences between smallcase vs mutual funds:

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 money is invested.

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 charge certain fees for their management services. Such a fee is known as the Expense ratio. 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 returns are calculated 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, mutual funds are managed by experts 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.

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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, and the units are computed at the NAV that is announced after the market closes. Furthermore, when the dividends are announced, a mutual fund typically reinvests them. 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. 

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 timing of entry and exit has to be decided by the investors.

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.