Once you decide to build wealth
with the equities, you encounter various choices.
Whether to invest through direct
equity?
Whether to invest through Mutual
funds?
Whether to invest through Smallcase? Etc.
A retail investor should avoid direct equity unless he has a good understanding
& knowledge of the equity market and can analyze businesses, predict long-term
trends, and spot opportunities, etc. The objective of investing in direct
equity is to beat overall market returns and there are very few who have been
able to do this successfully over a long period.
Hence the better choice for retail investors is to invest in the portfolios managed by market experts. A retail investor can either invest through Mutual Funds or Smallcase. The smallcase is a relatively new product but has gained popularity due to certain features missing in the existing products. In this article, we shall be discussing the difference between smallcase and mutual fund.
| Mutual Fund | Small case | |
|---|---|---|
| Trading & Demat Account | Investors do not require a Trading & Demat account for mutual fund investments | The Trading & Demat account is required in case of smallcase investment. |
| Constitution of Investment Portfolio | Investors get units of mutual funds which are backed by stocks of companies. The stocks are not held in the Demat account of the investor. The investors have no control over the sale and purchase of shares in their mutual fund portfolio and the same is managed by the fund manager on behalf of the investors. | Investors get shares of companies directly in their Demat accounts. The investors may also customize the smallcase and do changes in the portfolio. Further, the investor may choose to do periodic changes as advised by an investment professional. |
| Diversification | Mutual funds invest in a large number of companies depending upon the classification of the fund and offer more diversification in comparison to smallcase. | The smallcases are built on specific ideas, sectors, themes, etc. like Green Energy, affordable housing, electric mobility, etc which restricts the diversification. These are created and managed by SEBI registered investment advisors after using various techniques. For example, if an investor is bullish on electric vehicle space, he may invest in a smallcase of Electric mobility created by an investment professional. Further, the investor may choose to do periodic changes in the smallcase on the advice of these professionals. |
| Minimum Investment | In mutual funds, one can start investing with as low as Rs. 100 as the units of mutual funds may be allotted in fractions as well. For example, if a mutual fund is quoting at NAV of 200, by investing Rs. 100 an investor may get 0.5 units of the mutual fund. | The minimum investment depends upon the stocks in a smallcase and is generally more than Rs. 10000. For example, a smallcase containing 10 companies all quoting at more than Rs. 1000 shall require a minimum investment of more than Rs. 10000. |
| Expense Ratio | The expense ratio of mutual funds varies from 0.10% of AUM to 2.00% of AUM depending upon the fund. The expense ratio of active mutual funds (Direct) mostly ranges from 0.50% to 1.00%. | The cost structure of smallcase works differently from mutual funds. A smallcase may be open to the public in which the investor will have to pay brokerage or it may be available on a subscription basis in which the investor needs to pay additional charges to subscribe. |
| Exit Load | The mutual funds charge exit loads of 1.00%-2.00% in case the investment is redeemed before a particular tenure, generally one year. | The redemption in the case of smallcase does not attract any exit loads. |
| Risk | The mutual funds carry less risk than smallcase due to more diversification and as the portfolio are completely managed by fund managers. | The smallcase investment carries a high risk due to a concentrated portfolio and the investor may take wrong decisions depending on news flow. |
| Taxation | The equity mutual funds investment attracts a short-term capital gains tax of 15% in case an investment is redeemed within one year and a long-term capital gain tax of 10% for gains above Rs. 1.00 lacs per year if an investment is redeemed after one year. | The taxation is the same for smallcase investments as for mutual fund investments. |
Mutual Funds Vs Smallcase – Which
is the better option?
The smallcase investment is positioned somewhere between direct
equity investment and Mutual Fund investment. They work on a similar concept of
a basket of stocks. Smallcase investment offers greater control over
investment, larger transparency, and lower charges However, in smallcase investment;
an investor needs to have better knowledge of equity markets. The smallcase investment
also requires higher capital and carries higher risk. An investor who wants to
invest directly in equities but does not have time to analyze the entire group
of stocks may consider investing through smallcases. The investor should invest
in smallcases of experienced professionals with a good track record.
The mutual funds, however, offer less control over the investment along
with lower risk. Investors with a conservative or moderate risk profile should
avoid smallcase investments and invest through mutual funds depending upon
their goals. Investors with an aggressive risk profile and good market
knowledge may invest part of their portfolio in smallcase for the possibility
of higher returns.
We have been receiving various queries from our blog readers in
respect of smallcase investing. We have tried to answer these in the following
paras.
Can I invest
in smallcase on upstox, HDFC, or ICICI Direct?
Yes, you can invest in upstox smallcase.
Further the smallcase investing is also offered by HDFC Securities and ICICI
Direct. The link to the websites is given under “Sources”.
What is all
weather investing smallcase?
An all weather investing smallcase strategy
is to invest in various asset classes i.e. equity, gold & debt. The
strategy reduces the volatility of investment and ensures that the investment
is protected in times of market downturn. The expected return from smallcase
all weather investing is less than the returns from equity smallcases.
What is
Dividend aristocrats smallcase?
Dividend aristocrats smallcase consist of
high dividend paying companies. This smallcase is suitable for conservative
equity investors.
What are
smallcase rebalance charges?
Smallcase rebalance is the periodic updation
in smallcase as per an investment professional. It may involve selling/buying shares
of new or existing companies in the smallcase. The rebalancing is a simple act
and does not require much effort. It can be done with a few clicks. The
advisors charge for allowing rebalancing of smallcase and the charges vary for
different stock brokers and also for different smallcases.
What is the best
electric mobility smallcase/Electric vehicle smallcase?
We are receiving this query from many blog readers due to the government’s
thrust on electric mobility. The electric mobility smallcase/electric vehicle
smallcase is offered by various investment advisors, and stock brokers. However,
this carries a high risk as the industry is still at the nascent stage. You
shall consult your financial advisor who may better provide investment advice
depending on your risk profile.
Disclaimer: This
article is for informative purposes. The investors shall consult their
financial advisors before making investment decisions.
Sources/Links:
https://smallcases.upstox.com/ (Link for upstox smallcase)
https://www.hdfcsec.com/smallcase (HDFC
Smallcase)
https://smallcases.icicidirect.com/ (ICICI
Direct smallcase)
https://www.smallcase.com/ (Smallcase)
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