First, the similarities. equity mutual funds and smallcases are both a portfolio of stocks. Both investment options can help you take exposure to the stock markets and build wealth over the long-term. In both cases, there is a team of expert analysts and researchers who do the hard work of picking stocks for you.
While equity funds have helped investors create wealth for years and years, they do have certain flaws. The idea of a smallcase came with the need to have an investment product devoid of these flaws.
A smallcase is a basket of stocks or ETFs that relate to an idea, theme or strategy. Similar to mutual funds which help you build a diversified long-term portfolio, smallcases offer the additional benefits of being simpler to understand, low-cost and transparent.
Created by SEBI-registered entities, smallcases are trusted by over 6,00,000 investors.
1. Lower cost of investment
Equity funds have an annual expense ratio of 1% to 2.5%. The direct plans are much cheaper than the regular plans, so let’s assume an average expense ratio of 1.5%.
The expense ratio is the annual investment fee deducted from your investments in an equity fund. This is the cost you pay for investing in a fund. Let’s say you invest ₹20,000 every month in an equity fund. In a year, you will invest ₹2,40,000 and 1.5% of that is ₹3,600. This is what you’re paying the equity fund as fund management fees and fees for other expenses. If you have invested in a regular plan, then the distributor’s commission will also be a part of the expense ratio. This expense ratio is automatically deducted from your investments.
In comparison, you only pay fees/brokerage when you place orders for a smallcase. This brokerage would depend on the broker with whom you have a Demat account, but on average is around 0.3%. In the case of Zerodha, where there is no brokerage, a flat ₹100 convenience fee is charged for most smallcases, irrespective of whether you are investing ₹10,000 or ₹10 lakh. There’s no management fee charged by smallcase. Hence, investing in a smallcase invariably ends up being a fraction of the expense ratio of an equity fund.
This can have a large impact over time. Imagine you have made an initial investment of ₹10 lakh – this gives 15% returns annually for 20 years. In an ideal world where no fees are charged, this will grow to an impressive ₹1.64 crores. However, fees have to be paid. With mutual funds, this will grow to ₹1.09 crores – but with smallcases, the same portfolio will grow to ₹1.51 crores. Detailed calculation and assumptions can be found here.
As such, the amount you pay will significantly impact the amount you are ultimately left with. Fees matter because saving on them boosts our ultimate returns, which is why we created smallcases to be low-cost, to begin with.
2. Flexible and transparent portfolio
An equity fund and a smallcase are both a portfolio of stocks that have been built by experts and research analysts. But the experts are not the only ones who know everything. You might have specific knowledge about a particular stock, because of which you might want to emit or add it to your portfolio.
An equity fund won’t allow you to do that. A smallcase will. When you invest in an equity fund, you have to compulsorily take exposure to all the stocks in the fund’s portfolio. But, a smallcase’s portfolio can be customized by you. Don’t like a stock? Remove it. Want to invest in one more stock? Add it. Want to increase exposure to a stock? Do it.
Not only is a smallcase’s portfolio this flexible, but it is also more transparent. An equity fund reveals its portfolio constituents only once a month, while a smallcase portfolio can be viewed anytime you want.
3. Always true to the mandate
Every equity fund has an investment mandate. The mandate is a declaration of the type of stocks that the fund will invest in. For example, a large-cap fund will have the mandate to invest a majority of its assets in large-cap stocks. You invest in such a large-cap fund because you want a stable investment. But what if the large-cap fund suddenly starts increasing exposure to mid- and small-cap stocks? That would make the fund riskier, which is not what you wanted.
This shouldn’t happen, but it does because equity funds have to show outperformance in comparison to their peers. An equity fund can move away from its mandate in lieu of returns, but a smallcase won’t.
A smallcase doesn’t compete against other smallcases. Every smallcase is built on a theme, idea or model and stocks that don’t adhere to this mandate will not appear in the smallcase filters. What you opt for is always what you’ll get.
4. Ownership of shares
When you invest in a mutual fund, you get fund units. On the other hand, when you invest in a smallcase, you get shares in your Demat account. This is a big plus, because it allows you to earn dividend income directly from the company. As you may know, the dividends received from “Dividend schemes” of Mutual Funds aren’t exactly dividends in the sense of an additional income coming from an invested company – they’re more akin to a systematic withdrawal of capital.
Equity fund dividends are not actual returns or additional profits. They are a part of your own investment only. But if your smallcase investment is worth Rs 1 lakh and a company within that smallcase declares a dividend, then you will receive the dividend without it lowering your entire investment value. This truly becomes an additional income that you can earn thanks to direct ownership of shares. To learn more about this, read this article on Everything you need to know about Mutual Fund Dividends.
Note that after Budget 2020, DDT (Dividend Distribution Tax) has been abolished – dividends now earned from either stocks, smallcases, or mutual funds are ultimately taxable at the hands of the investor.
5. Quicker redemption
When you place a redemption request with an equity mutual fund, the redemption is subject to the fund’s NAV at the end of that day. The redemption usually takes three working days to get processed.
On the other hand, a smallcase can be tracked in real-time during the market hours. The redemption requests are also placed in real-time because the shares you own can be sold while they are trading on the exchange. Adequate liquidity is one of the stock selection parameters used in smallcases, which facilitates quick redemptions.
In a smallcase, you can also pick and choose the shares that you want to sell. This is a more flexible way of exiting your investments partially.
6. High AUM doesn’t hurt investments
Often, equity funds pause fresh inflows from investors because their burgeoning assets makes it difficult to take nimble stock calls. This happens often in the case of mid-cap and small-cap funds, where their big AUM does not allow them to make impactful stock picks. Hence, a growing size can hurt an equity fund’s investment capabilities.
A smallcase has no such thing as an AUM of its own. When you invest in a smallcase, you get shares in your Demat account. The money doesn’t stay in the smallcase and hence, AUM is never a factor that affects investment calls.
7. Easier to understand
NAV, expense ratio, AUM, growth option, dividend option, dividend reinvestment option, direct plan, regular plan, portfolio turnover, risk grade, return grade—this is just some of the jargon that comes with equity funds.
There are also many equity fund categories and a large number of options within each category to choose from. Not only are equity funds difficult to understand, but it is also very hard to figure out which fund to invest in.
In comparison, a smallcase comes with just the rationale, returns, and stock weights. There are no different plans or options and no additional jargon to comprehend before you invest. All you have to do is understand the concept behind the smallcase to make an investment decision.
8. No cash holdings
It is often the case that equity mutual funds hold a substantial portion of their assets under management in cash. Historically, some equity funds have held even up to 15% in cash. There are two reasons why funds keep cash in their portfolio–to be ready for sudden redemption and if the fund manager is unable to find invest-able opportunities.
In either case, cash holdings can hurt the performance of the equity fund. If the fund manager is not able to deploy the cash at the right time, the fund’s performance can get impacted.
However, a smallcase never has cash holding. Since a smallcase doesn’t have AUM of its own and the stocks are bought and sold at their market price, there is no requirement to hold cash. Hence, the negative impact of cash holdings in equity funds will not be seen on smallcases.
9. Aligning investments to ideas
Equity mutual funds allow you to invest in stocks by market capitalization, investment approaches or sectors. You can invest in a large-cap fund or a value investing fund or an infrastructure fund. But equity investments should not be limited by market cap or sectors.
A smallcase allows you to invest in themes that are based on strong ideas. GST, affordable housing, electric mobility, etc are all ideas and themes that make a strong investment case. For example, India is an emerging economy with a growing middle class with 45 crore people expected to be added to this category in the next 15 years. The Great Indian Middle Class smallcase includes companies that are expected to benefit from the growth in the Indian middle class.
A smallcase will allow you to invest in such themes or ideas, but there is no equity fund that will provide such exposure.
10. Higher returns
smallcases are built in a manner to optimize returns. A smallcase consists of no more than 20 stocks, which means that every stock has a meaningful impact on the portfolio’s returns.
The following table shows how the average smallcase returns have been way higher than the average equity fund returns over various time periods.
|1-year returns (%)||2-year returns (%)||3-year returns (%)||4-year returns (%)|
|Average of all smallcases||6.07||42.50||67.82||133.73|
|Average of all equity mutual funds||4.59||25.06||28.17||50.90|
|Total returns as on 5 July 2018|
As you can see, the numbers speak for themselves. Returns are primarily what we invest in equities for, and the higher the better.
Why smart investors choose smallcases
smallcases make it easy for you to invest in the equity markets. A smallcase is a basket of stocks or ETFs that relate to an idea, theme or strategy. Investors can choose from 50+ readymade portfolios created by professionals and invest in just 2 clicks through our broker partners – Zerodha, HDFC securities, Axis Direct, Edelweiss, 5paisa, Alice Blue, IIFL Sec & Kotak Sec.
Here are some recommended articles to help you start investing in smallcases.
- First-time investor? Here’s how to get started with smallcases
- Why direct stock investors should invest in smallcases
There's a smallcase for everyone
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