“Compound interest is the eighth wonder of the world. He who understands it earns it and he who doesn’t pays it.”
– Albert Einstein
Smallcase are portfolios of equities and/or exchange-traded funds with a specific theme or strategy. You obtain direct ownership of the individual stocks packaged together in a portfolio when you invest in Smallcases. This differs from mutual funds, in which you do not own the stocks that make up a mutual fund portfolio; instead, you own units in the portfolio. They may sound similar to portfolio management services (PMS), but they do not have a ticket amount of Rs. 50 lakhs. In that sense, Smallcases may be called ‘affordable PMS.’
Because you’ll be investing in shares directly, you’ll need a trading account and a Demat account. Investors’ trading account is debited and your Demat account is credited with stocks when you invest in Smallcase. As you own the stocks outright and can sell them at any time, there is no lock-in period.
Most Smallcases, like the ones from TejiMandi, are intended to be long-term investment vehicles. Therefore, there is a possibility that they do not perform as well as predicted in the short term. However, they tend to tide over the volatility in the markets and outperform over longer durations. This, of course, takes skilled management and prudent risk measures to be put in place, like we have at TejiMandi that is a subsidiary of the industry leader Motilal Oswal Financial Services.
Smallcases are inherently a combination of stocks and ETFs. While there are many criteria you can look at when assessing Smallcases, one of the most important metric is, of course, the returns generated by a Smallcase. This is where the CAGR comes in handy. CAGR stands for Compounded Annualised Growth Rate, or ‘return’ you can earn through an investment in Smallcases. CAGR is a way to measure performance of different investments spanning different timeframes.
It is important to note that CAGR takes into account the capital appreciation of an asset, but not its dividends. However, in Smallcase investing, while the dividends are credited to the investor’s account, it is prudent that you reinvest your dividends into the basket of stocks and ETFs, so that your money compounds and grows at a faster rate, which makes this return more exhaustive.
Let’s deep dive into CAGR to know more about it in terms of Smallcase investing.
Compounded growth occurs when an asset generates earnings that are then reinvested to generate additional earnings. Aside from interest, this notion has proven to be a useful tool for analyzing and evaluating equity.
CAGR stands for compound annual growth rate and is a representative number of annualized average returns. It’s essentially a statistic that describes the rate at which an investment has increased over time, assuming that it has grown at the same rate each year and that the profits have been reinvested at the end of each year.
CAGR is a formula for calculating and comparing the historical performance of investments, as well as speculating on their future returns. It calculates the returns of assets, portfolios, and other securities whose values fluctuate over time with maximum accuracy and reliability. The CAGR calculation takes into account three aspects: the initial investment value, the number of years between them, and the final value at the end of those years.
CAGR = [(Final Value/Initial Value)^(1/time in years)] – 1
Assume you invested Rs 100 in a particular instrument in January 2010. After ten years, your assets were valued at roughly Rs 311 in December 2020. This supports the conclusion that the investment yielded an annual average return of 12% from 2010 to 2020.
We arrived at this figure by applying the CAGR formula. Here’s how:
CAGR = [(311/100)^(1/10)]-1
As a result, the CAGR in this example is 12%.
CAGR represents the annual return earned by the Smallcase since its inception. CAGR reflects the absolute return earned by the Smallcase from the date of its launch if the Smallcase has been live for less than a year. The CAGR number is calculated using only live data.
When comparing Smallcases and making investment selections, CAGR becomes extremely crucial. The CAGR calculations are based only on live data in Smallcase and the live data represents the time period during which the CAGR for that Smallcase was determined. This not only allows the investor to more properly compare their Smallcases, but it also ensures that they are fully informed about how the returns on their Smallcases are computed.
Volatility is an important factor while calculating CAGR. Given Smallcases are made of stocks and ETFs that experience price fluctuations on a daily basis, your portfolio’s investment value is bound to fluctuate. If the daily change in a portfolio’s investment value is excessively large, it suggests the portfolio’s stock values are changing too quickly. These portfolios have a high level of volatility. In such cases, the CAGR, which is a measure of growth rate on an annual basis may be impacted as the beginning value and the final value of the investment fluctuate.
Now, high volatility need not necessarily be evil. Especially in Smallcases such as the TejiMandi portfolios that come with superior fund management services, the fund managers are proactive to assess the risks and make calculated moves. The fund manager would use the volatility to advantage and ensure maximum potential returns are captured from the market while protecting the capital invested. This does not however take away the need for investors to be prudent and analyse their risk quotient before signing up for Smallcases.
To help investors understand this inherent risk that volatility may bring, each Smallcase is assigned to one of three volatility categories that are displayed upfront: High Volatility, Medium Volatility, or Low Volatility. This is accomplished by contrasting Smallcase vs. larger market volatility. Investing in High Volatility Smallcases means that the value of your investment can vary dramatically and quickly.
Here’s a look at how TejiMandi’s smallcases fare on the volatility parameter
- Teji Mandi Multiplier: Concentrated portfolio of small and midcap stocks that are likely to show non-linear growth – High Volatility
- Teji Mandi Flagship: Concentrated portfolio of 15-20 stocks that blends short term tactical bets with long term winners – High Volatility
The compound annual growth rate (CAGR) represents the average annual return achieved by a Smallcase after its inception. Each CAGR value has a time label to help contextualize it. It specifies the time frame for calculating the CAGR for that specific Smallcase. Smallcases that have been live for more than a year now have an annualized CAGR, whereas those that have been open for less than a year will display absolute return figures rather than the CAGR.