Smallcase explained: What distinguishes it from a mutual fund?

Anthony Fernandes
/ Categories: Knowledge
Smallcase explained: What distinguishes it from a mutual fund?

Curated theme-based portfolios, in which, investors can park their funds based on their conviction have grown popular on Dalal Street. One such investment tool is smallcase - a new and exciting product for retail investors that offers portfolio diversification as an in-built feature.   

Introduction  

A smallcase is a basket or portfolio of stocks that are professionally tailored to reflect an investment plan, idea, or theme. This portfolio of stocks is researched and curated by various entities such as brokers, investment advisors & asset management companies, which are offered by Smallcase Technologies, an investment platform based in Bengaluru. Some baskets are created by SEBI registered smallcase experts, some by market experts or you can even create the baskets or smallcases yourself too.  

 The smallcases may be based around asset allocation, smart beta, model-based, sectoral strategies, or market capitalisation. For example, one can invest in companies that are working towards affordable housing projects under the government plan on providing affordable housing to all, by investing in the ‘Affordable Housing’ smallcase. Similarly, one can invest in various sectors expected to do well in the future (IT, pharma, speciality chemicals, etc) by investing in the respective smallcase for that sector. There are even small cases related to market-leading metals and mining stocks if one wants to make the most out of commodity reflation. The popular ‘Dividend Aristocrats’ smallcase consists of companies that have been consistently increasing dividends over time, while the ‘Safe Haven’ smallcase that feature low-beta stocks, help protect against market volatility. Hence, there exist smallcases for every type of strategy or theme an investor can come up with.   

How does it work?  

  To invest in smallcases, an investor needs a Demat account. Smallcase is partnered with leading brokers including Zerodha, HDFC Securities, Kotak Securities, Axis Direct, Edelweiss and Angel Broking. When you buy/sell a smallcase, the stocks featuring in it will be credited or debited to your Demat account. The minimum investment amount may vary, depending upon the stocks that make up a smallcase. There is no lock-in period for investment and once a smallcase is chosen, you can invest a lump sum or choose to run a systematic investment in it. Besides, standard brokering charges are nominal. There is a one-time registration fee of Rs 100-150 charged for readymade smallcases.   

 What differentiates smallcases from mutual funds?  

  Smallcase portfolios often get compared to mutual funds. While the two are similar in many ways, there are certain differences between them that you should know before investing.   

 Lock-in period:  As mentioned earlier, there are no lock-in periods when it comes to investing in smallcases. While some mutual funds prevent investors from exiting their investments for a particular period, this is not the case with smallcases as in latter, one may exit at any time.   

Transparency & control:  Investing in smallcases gives you better control over investments as the shares get directly transferred to your Demat account. The shares are retained with the investor at all times and you get to know where your money is invested, which is not the case with mutual funds. MFs disclose the stocks in the portfolio only at a fixed time. Smallcase also allows an investor to re-balance by moving stocks in and out of the bucket with greater freedom if they want to increase or decrease exposure in a certain stock.  

 Cost of investment:  Mutual funds are known to charge up to 1.5 to 2 per cent in annual fees on the amount invested as an expense ratio that includes fund management, distributors’ commission, and other expenses. This is not the case with smallcases, where the average fee charged is around 0.2 per cent. Smallcases work out to be a significantly cheaper option as compared to mutual funds in terms of fees.   

 Capital requirement:  One can invest in mutual funds with a lump sum of Rs 5,000 or with a SIP of as low as Rs 500 per month to enjoy the benefits of diversification. However, smallcases need higher capital for investing. Since you are directly investing in shares, you will have to buy each unit of them. There are smallcases that start with an initial investment of Rs 5,000, while some can go even up to Rs 90,000.  

Shareholders’ benefits:  In smallcases, the investor is a shareholder of stocks that constitutes the smallcase. So, when the stock companies offer bonus shares, dividends, or rights issues, the investor gains directly. In the case of mutual funds, since the investor is not a shareholder in the stock company, such options are not available for the investor. Nevertheless, these events result in changes in NAV, which may contribute to wealth gain.  

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1 comments on article "Smallcase explained: What distinguishes it from a mutual fund?"

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Pp Di

Tax treatment i.e. Calculation of STCG and LTCG can be explained.

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