When it comes to picking the best asset to allocate money into, the comparison between two classes is akin to comparing apples to oranges. One asset may promise recurring income while another may return blockbuster appreciation on capital while yet another may package a combination of both. One of the methods of investing in equities for risk-adjusted gains that have gained relevance in the recent past is Smallcase. It follows a risk-mitigating strategy for investing in themed baskets of stocks and ETFs.
As of December 2021, there are around 250 Smallcases created and managed by 120+ SEBI Registered Professionals. Although these investments intuitively make a lot of sense for a host of investors, it can be a daunting task to decide which investment is best for you. So below, we will outline some points to consider when making your decision.
Factors to consider while judging Smallcases
The first question you need to ask yourself is: What am I trying to achieve? This is the key question as it will determine which asset class best suits your needs. If you are looking for capital preservation in an “unfriendly” investment environment, then cash or investing in a liquid fund may be more suitable for your needs. However, you may also want to explore Smallcases that follow an ‘all-weather investing’ theme to ensure you don’t miss out on opportunities.
If you are trying to achieve reliable capital growth or you have a high-risk tolerance, then equities through Smallcase is your best bet. Such investors may want to check out Teji Mandi’s exclusive portfolio of small and midcap stocks that are likely to show non-linear growth.
Investing Style
Once you have determined that Smallcase as an asset class is right for you, the next question to ask is: What type of investment am I looking for within the bundled investments available on the platform? For example, within equities, there are different types of investments such as large-cap, small-cap, mid-cap, dividend-yielding, tech stocks, high-growth, etc. There are also different investment styles within each of these classes such as value or growth investing. The investment choice will depend on the returns you are looking for (value vs growth) and the risk tolerance (conservative vs aggressive).
Expected Returns
What is your return expectation? Your return expectation should be in line with your investment timeframe. For example, if you are Investing For The Long Term (5+ years), you can afford to invest in a Smallcase with higher risk as you have time to ride out any bumps in the road. Conversely, if you are investing for the short term then it is best to stick to a more conservative Smallcase with lower risk.
Portfolio Construction
While evaluating Smallcases to invest in, you also want to ensure that the portfolio of stocks/ETFs included is relevant to your needs. The Smallcase platform allows you to build portfolios on your own or on the suggestions of experts such as Teji Mandi. You can also see how different allocations within the Smallcase have performed historically. To keep your risk to a minimum, it is best to use an asset mix that suits your profile and holds the same stocks over extended periods of time rather than frequently changing your holdings to chase after higher returns.
Risk Profile
Whilst allocating money to equities comes with its inherent risks, you can lower the risk by investing in a Smallcase that is more aligned with your risk profile. For example, if you are uncomfortable investing in stocks that have a high price-to-earnings (P/E) ratio, then avoid growth stocks and invest in value stocks- you can pick a bundle that invests only in resilient FMCG companies. You can also use the filtering options on the Smallcase platform to find Smallcases with good value metrics (cheaper Smallcases) or look only at Smallcases with stocks of companies that have strong balance sheets (less debt).
Investment Capital & Time Horizon
Different Smallcases have different risk profiles, some are more income-centric while others are growth-focused. The key is to find the right mix of investments that generate stable cash flow, that is less affected by market volatility while growing.
For example, if you have lots of time on your side, then it makes sense to be more aggressive and invest in Smallcases with higher upside potential. If you are looking for income generation over the short term (1-5 years), then focus on investments with stable cashflows.
Portfolio Managers
Please do not confuse the role of Smallcase portfoliomanagers with the role of your financial adviser. The portfolio managers are responsible for finding and monitoring Smallcases, but you will still need to find a financial adviser who will aggregate all your investments into one portfolio (i.e stocks, bonds, etc) and risk profile. Smallcase typically brings together companies with strong fundamentals, where there is scope for further growth, but for overall wealth gains, it might be a good idea to have a financial professional look at your portfolio and assess the outcomes.
Goal-Based Investing
This brings us to the last point of this article- goal-based investing (for example, saving up for a house downpayment). If you are saving up for a house downpayment, then the best you can do is to pick investments that have a low correlation with your existing portfolio. You want to diversify away from your current stock holding so pick some stocks from different branches of the industry (i.e tech vs industrials). This will help your portfolio with diversifying the risk from market fluctuations as the time for withdrawals nears even as your portfolio builds with capturing maximum returns from the market.
In terms of risk profile, it helps to be conservative when investing for a goal that is several years away. This will protect your principal amount and enable you to achieve your goal without taking too much risk.
Conclusion
Smallcase offers a variety of investment options to fit different risk appetites, time horizons, and investment goals. You can find the right mix of investments to match your needs. The platform offers a variety of filters to help you find the right Smallcase for your needs- just do your research, study the risks and weigh the returns before you proceed.
