What is a Smallcase?
Smallcases are, in essence, a basket of carefully chosen stocks and securities that follow a singular theme or idea. A novel investment product carefully engineered by a company of the same name, a Smallcase, mimics a custom Portfolio Management System (PMS) built at scale. simultaneously serve the needs of a similar profile of investors- hence keeping the entry barriers relatively low.
By design, a Smallcase follows the traditional PMS model that was set up for financial institutions catering to wealthy investors. It enables investors with smaller ticket sizes to purchase securities in small denominations, thereby allowing an entire portfolio of stocks to be purchased in a single transaction.
Choosing from a premade Smallcase or building your own is entirely up to you. However, if you are looking to give the gift of financial prudence to your loved ones this holiday, a Smallcase is definitely an investment worth considering.
Let’s read through the rationale behind what makes this asset structure attractive to investors:
It provides curated portfolios
A Smallcase consists of anywhere between 5-10 stocks that follow a thematic or concept-driven strategy. With their own set of advantages, disadvantages, and risks, these stocks are curated to form a balanced investment portfolio. Moreover, they enable investors to double down on a niche within a larger industry; for example, renewable energy within the larger energy domain or B2B SaaS companies within the larger tech domain would constitute a specialized thematic smallcase.
It prevents over-diversification
Investing in one stock can prove to be extremely lucrative or disastrous, depending on which way volatility sways over a period of time. But when you spread it out among many stocks, your risk converges towards a lower average. This is because the more stocks you diversify across, the more likely it is that they all follow similar trends. This is the same in the case of mutual funds. Buying a theme-based Smallcase prevents this by broad-based averaging of returns. If a niche industry performs, you will gain from it.
It allows goal-based investing
Modern financial market theory views investing through the lens of risk-return tradeoff. Smallcases are squarely placed in the realm of goal-based investing, wherein they are designed to achieve a singular goal instead of focusing on portfolio returns alone.
Let us take an example. If you need enough funds to cover your child’s college education in the next 5-to 7 years, investing in a Smallcase that focuses on capital appreciation as well as healthy dividend yield will be an ideal choice.
It creates an accessible Portfolio Management Services (PMS)
Projecting returns is difficult; protecting wealth generation even more so. By leveraging the benefits of the traditional PMS model, Smallcases make it easy for investors to not only diversify across their core themes but also provide access to the most sophisticated PMS strategies (those used by institutional players) at a fraction of the cost. This makes them an attractive proposition for savvy investors. As per SEBI’s norms, an investor needs to have at least Rs.50 lakh worth of investable corpus to be eligible for PMS.
- A low minimum ticket size. Most Smallcases allow investors to invest as little as Rs. 500 at a time.
- Options to choose from a pre-curated smallcase or to build your own.
- PMS access at almost negligible costs compared to traditional PMS models, where investors typically pay 5-6% of their portfolio value in fees annually. In the case of a Smallcase, the amount charged is a flat Rs. 100 (plus GST), both for a created or customized Smallcase. Moreover, if your amount of investment is less than Rs. 4000 on the day you are buying the Smallcase, the fee charged is limited to 2.5% of the investment value plus GST at 18%.
- SIP route for periodic investments is possible.
- It is easy to buy and sell, just like stocks.
- The expense ratio of Smallcases varies from 1 to 3% of total investment. In some cases, it may be a fixed sum of money.
- Smallcases are actively managed asset structures curated by fund managers with proven expertise.
- Smallcases are readily integrated with most existing stock brokerages. You can buy them directly from your Demat account.
Smallcases offer all the benefits of both ETFs and mutual funds with no lock-in period, minuscule management fees, and minimal exit barriers. However, it is important to note that no investment can ever be classified as 100% safe and there are a few risks associated with Smallcases. These are:
It is tough to time the market
Since you are investing in a portfolio of stocks, there exists a chance that some or all your investments might not perform well at the same time. For example, if one investment is a real estate project that is facing regulatory hurdles and delays- you might see your returns dwindling, even though the sector you invested in generally did well.
These are suited for investors who understand the stock markets well
Maintaining a diversified portfolio of stocks is not as simple as it seems. Many depths can come up and surprise even the experienced expert.
They do not have a fixed tenure
Smallcases have no fixed tenure, but will still be affected by liquidity risk. If you need to pull out money from your Smallcase, it might take a few days for the money to be available in your Demat account. This is similar to the process of redemption of individual stocks.
Smallcase is a product that allows investors to reap the benefits of diversification and expert fund management. It comes with no lock-in period, at an investment amount as low as Rs. 500, along with a minimal fee. This makes Smallcases more accessible than the traditional PMS plans.
While choosing a Smallcase, be mindful of your financial goals and choose something that aligns with them to get optimal returns. If you are a conservative investor, look at the income-generating assets. If you want aggressive growth and short-term returns, you can choose a higher return generating smallcase. Read more about conservative and aggressive investment in our blog here.
At TejiMandi, we help you choose the correct investment path. Contact us to start investing today.