Mutual Funds v/s Smallcase

5 mins read

Mutual funds are prevalent investment vehicles for newbie investors. When you invest in a mutual fund, you get access to the entire portfolio of stocks indirectly and ownership of the unit of the mutual fund. However, the investor does not have any liberty to choose the components of the portfolio. That is where the reasonably new investment product, Smallcase, comes into the picture.

The concept was brought about in 2015 by a fintech start-up named Smallcase. Smallcase is a bundle of stocks that represent a particular theme, idea, or sector. It allows investors to buy a portfolio of stocks directly on their demat account without investing through mutual funds. Many brokers and wealth managers have adopted this idea and offer smallcases as portfolios on the start-up’s platform. Smallcase today has ready-made portfolios from licensed SEBI professionals. For instance, a Chemical Smallcase is a portfolio of prominent companies in the chemicals products industry.

They are focused on a popular market theme like electric mobility, GST, smart city, etc., a financial parameter like debt-free companies, or different risk profiles of an investor. They can also be based on investment philosophies like Graham, Warren Buffet, etc. It is the judgment of the investor to decide whether he must stay invested in the theme or decides that the theme has played out. However, the smallcase may notify when the same has played out, or the model has undergone a change.

Investors are often in two minds when choosing between Smallcase v/s mutual funds. Smallcases are a good investment option for investors who have a fair understanding of the stock markets and want to invest in a portfolio without paying fund management fees. This is because a smallcase offers a researched basket of stocks by an expert without bearing the expense ratio of a mutual fund. Also, the recommended portfolio of stocks can be altered based on the judgment and requirements of the investor. An investor can change the weights or do away with certain or add their stocks to their smallcase. A mutual fund does not allow this flexibility to investors.

Difference between smallcase and mutual funds can be summarised as:

Particulars Small Case Mutual Fund
Control over Investment Portfolio The shares in a smallcase are directly credited to the investor’s demat account. The investor has the choice to buy or sell any share of the smallcase as and when required. An investor may have the freedom to choose between the type of mutual fund based on asset class, sector or theme, but one cannot select which shares these funds invest in.
Holding pattern The demat account will be credited with the shares, and any dividends will be reflected in the investor’s bank account. Investors are given units of the mutual fund and not the shares of the portfolio. There is no need for the investor to open a demat account.
Risk Involved Smallcases come with a much higher risk than mutual funds because of more negligible diversification and no in-built hedging strategies. On the other hand, Mutual Funds are bound by the constraints on the amount of risk that they can take. Fund managers adopt various risk mitigation strategies and ensure regular review and monitoring.
Exit Load Smallcases do not have a lock-in period, and thus there are no additional exit load charges. Mutual Funds may have a minimum lock-in period, and an exit load will be applicable.
Expense Ratio Each smallcase has a different expense ratio. Some are free of cost, while some require a subscription. The fees are deducted from the trading account. The fund management fees are deducted from the investment amount, i.e. they are adjusted in the Net Asset Value (NAV).
Investment Amount Smallcases need higher capital as the investor needs to buy at least one share of each company to create a portfolio. Thus with lesser capital, one can achieve only limited diversification. Mutual Funds can allow investors to achieve diversification with much lesser capital. The minimum amount for lumpsum investment is Rs. 5,000, and for SIPs, the amount can be as low as Rs. 500.

Smallcases and mutual funds are based on a similar concept. Both these products invest in a portfolio of securities to help in capital appreciation for investors. The difference between a mutual fund and smallcase is the functioning of the two products. Mutual funds have lock-in periods, exit loads, less transparency, higher expense ratios, and do not give control to investors. Smallcases, on the other hand, are more flexible, have no lock-in period, more transparency and greater control over the portfolio.

However, one needs to have explicit knowledge of the stock markets before investing in a smallcase. The timing of entry and exit is to be decided by the investor. The responsibility of choosing the appropriate smallcase based on his goals and objectives lies with the investor.