NEW DELHI: Mutual funds have been popular instrument among investors who want to earn better returns than the traditional investment products such as fixed deposits or Post Office savings schemes.
However, many retail investors cannot resist the temptation of investing directly in stock markets. But retail investors, typically, lack stock-picking expertise that large institutional or high-net-worth individuals have. Yet they take a plunge in direct equity investment, and in many cases end up burning their fingers.
While several brokerage and investment firms have Portfolio Management Services (PMS) which offer direct stock investment services, thresholds of PMS are so high that very few retail investors can afford it. So, these investment firms have come up with theme-based direct stock portfolios/baskets for retail investors. Smallcase Technologies, a company, has brought in stock baskets for investors based on different themes and ideas so that they can choose themes from a wide range of offerings.
And these stock baskets are now offering retail investors an alternative route to directly invest in stocks instead of investing through mutual funds. But can Smallcase-like solutions replace mutual funds? Should retail investors shift their investment from mutual funds to baskets of stocks offered through the Smallcase platform?
Smallcase: A low down
Smallcases are baskets of stocks or exchange traded funds (ETFs ) that are professionally managed by SEBI-registered investment managers and advisors. Each Smallcase is based on a specific idea that could be a theme, strategy or objective. Some of the most popular Smallcases include asset allocation-based smallcases all-weather Investing, equity and gold, while the factor-based strategies include smart beta, dividend based, models (momentum, value), etc.
While both Smallcases and mutual funds provide a portfolio-based exposure to equity, the constructs and mechanics differ a lot. In Smallcases, the investor owns the constituent stocks in their own demat accounts, while mutual funds are pooled structures, where an investor gets units of the scheme they chose.
In Smallcases, the investor has full visibility and transparency into the composition as well as how the individual constituents are changing, the advantage mutual fund investors don’t have. For instance, in the case of mutual funds, the investor can track one change daily in the NAV whereas with Smallcases, the investor has full visibility and transparency into the composition as well as how the individual constituents are also changing. Also, in the case of rebalancing/changes in composition, there are tax implications in the case of smallcase, which don’t occur with mutual funds.
Vasanth Kamath, founder and CEO of Smallcase, says: “The Smallcases ecosystem, which we are building, is an open platform layer for multiple capital market participants (brokerages, distribution apps, investment managers to create, offer and enable a new class of products called Smallcases.”
Kamath says mutual funds are more diversified and broader whereas Smallcases are more focused and related to the specific idea they reflect, which result in a larger catalogue of Smallcase ideas and strategies that could be created with a smaller portfolio composition.
According to him, ready-made portfolios of stocks/ETFs reflecting various ideas in the form of smallcases become a simpler and more transparent option for new investors to choose from based on what they understand.Portfolio-level diversification and professional management also reduces the risks that come with single-stock investing. In Smallcase, there are 400+ portfolios managed by registered professionals. Investors can use their existing trading and demat accounts with 15-plus partnered brokers to login to the Smallcase app.
A user can then subscribe to a Smallcase, place an order to buy the whole portfolio with one-click, see the transaction happen in real-time, and monitor performance on the app or web. Users will receive notifications on their Smallcase app, which tells them when a change to the portfolio is due based on the manager’s regular monitoring and review. Users can wholly or partially exit the Smallcase at any time. Investment professionals say it is not an either-or choice between mutual funds and smallcases. Both have different types of advantages.
They say investors should invest according to their risk-taking capacity and understanding of products. According to them, the advantage of mutual funds is that they are actively managed by experienced and knowledgeable professionals, therefore, new investors should keep invested in these funds. However, those who have capacity to bear the risk can invest directly or go for theme-based portfolios according to their understanding.