22 April 2022

Smallcase Vs Direct Stock Investments

Smallcases are bundled and professionally managed investment products that consist of carefully chosen stocks and ETFs.

How do they fare against direct stock investments? Let’s explore

Smallcase Vs Direct Stock Investments "Know what you own and know why you own it."

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These seven insightful words by Peter Lynch sum up investing as an endeavor and how we should go about it. As an investor, if you put your money in a few companies whose business you understand, whose products and services you deem better (more competitive in price or quality or both) than the rest of the competition and those that are run by leaders you can trust, you will have done your job well.

However, the flip side to this approach is that it becomes difficult when the number of publicly listed companies you can invest in is large. The sheer number of choices may lead to an information overload for some and analysis paralysis for others. How do we pick a handful of companies among thousands of quality listed stocks? What if we miss the boat?

The answer lies in exploring what works for you depending on the return you are seeking and the risk you’re comfortable taking on. In this blog, we will investigate two approaches- investing directly into stocks and/ or buying into bundled investments products, namely Smallcases.

Before we proceed, let’s tell you more about Smallcase.

What is a Smallcase?

Smallcase is an online investment platform that allows you to invest in a basket of stocks and ETFs curated by experts. It is different from traditional asset allocation structures as it offers a more diversified and cost-effective way to invest in the equity markets.

How does it work?

Smallcases are available (read integrated) with the demat accounts of most leading stock brokers. Once you have opened an account with a supported broker and linked it to your Smallcase account, you can start investing in any Smallcase of your choice.

The beauty of this platform is that it allows you to invest in a diversified smallcase of theme-based investment without having to do the research yourself or worrying about the underlying securities. RIAs like TejiMandi who create Smallcases do all the hard work for you and handpick stocks and ETFs that they believe will outperform the larger industry. Of course, your returns depend on the outcome of the investment you’ve chosen that depends on how the theme or idea plays out in the market.

The platform also offers a cost-effective way to invest, with most Smallcases charging an annual fee of 2-3% with a minimum investment amount; in some cases, this is a flat fee.

TejiMandi, for example, has a flat-fee model that is independent of the investment amount. It is Rs 149 per month if you opt for a 6-months plan or Rs 199 per month should you choose a 3-months plan. There is no cap on investment; investors may invest as much as they want, the prices remain the same.

Now let’s get to the meat of the conversation- let’s do a like-to-like comparison of direct investments in stocks vs smallcases.

a) Smallcase

Theme-based Investing

Smallcase is suited for investors looking to invest in a diversified and bundled investment structure with expert assistance. They do not want to fly solo.

Whether you’re a beginner or an experienced stock-picker, Smallcase can work for you if you want to buy an idea or a niche but don’t want to be the one responsible for picking the probable winner. For example, if you want to invest in electric vehicles as a theme but are lost on which company to place your bets on, smallcase gives you the right basket that consists of a portfolio of stocks and ETFs that invest in the space.

Diversification

Another attribute of Smallcase is diversification- since at its heart it’s a bundled investment. What this means is that if you invest in say a Smallcase of electric vehicles, you’re not just investing in high-growth companies, you’re investing in a basket of rapidly scaling companies across sectors. The fund manager in this case will decide the benchmark of what qualifies as high-growth and so on.

Actively managed Portfolio

Since by design a Smallcase is a scaled-down version of a portfolio management service, it involves the supervision and expertise of a Portfoliomanager that comes at a fee. Your money is entrusted in the hands of trusted investment experts who not only devise custom investment structures but are also responsible for its performance and returns. TejiMandi as a SEBI-registered investment advisor and a subsidiary of Motilal Oswal Financial Services is qualified for efficient fund management and has the right resources to help you with your investment needs.

b) Investing directly into stocks

Direct stock investment is suited for investors who do not need expert assistance and would rather fly solo. This is a more hands-on approach where you are picking stocks and managing the portfolio yourself. You need to have an understanding of what you’re buying, why you’re buying it, and how the stock performs in relation to the market and its peers. You may also need to try and time the investment – the entry as well as the exit – in order to capitalize on the investment to the maximum possible extent.

Risk Tolerance

Direct investing requires due diligence, vigilance, and monitoring of portfolio positions. It is suited for investors who are comfortable with understanding risk profiles and willing to take on more volatile investment climates.

High Returns, High Risk

Direct investments are generally focused on generating high returns- so they’re better catered towards advanced investors. If you believe you can handle the volatility as might often be the case, i.e., if seeing unrealized short-term losses in your demat does not make your stomach turn, this sort of investment may be for you.

DIY Portfolio Construction

Direct stock investing offers a more hands-on approach and gives the investor the freedom to design and construct his/her portfolio as they see fit. If you’re okay with creating your own portfolio and managing it yourself, have the time, knowledge, and resources to do so, apart from the risk appetite and time horizon, then you probably would not require managed services.

Conclusion

Both Smallcase and Direct Stock Investing have their pros and cons. It ultimately boils down to what an individual investor wants- whether they want expert advice, a risk-reward balanced portfolio and the freedom of time and peace of mind, or the freedom to construct their own portfolios and manage them. There is no right or wrong answer- it depends on an individual’s risk tolerance, investment goals, and comfort level.

One thing is for sure- investors must be nimble to navigate through today’s highly dynamic markets, be certain about what their investment goals are and be willing to take decisions accordingly. In that sense, maybe, a managed portfolio like the TejiMandi smallcases may come in handy to give you the best of market opportunities alongside inbuilt risk management.

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