Smallcase or mutual funds: Which is a better investment?

Date : 25/10/2021
Read: 4 mins

Read in हिंदी: कौन बेहतर निवेश है: स्‍मॉलकेस या म्‍युचुअल फंड?

Find out if smallcases can completely replace mutual funds as an investment option, and how the two differ.

Which is a better investment: Smallcase or mutual fund?

Smallcase was introduced by the eponymous fintech company in 2015 as a new form of stock investment. But what is smallcase? Well, they provides a ready-to-use mix of stocks. Smallcase Technologies, the company, provides various smallcases, and the idea was quickly replicated by other brokers who offered their smallcases in association with the company. What is mutual fund investment? This invests in assets while offering units of the mutual fund scheme to investors. So, unlike mutual funds, in smallcases you get to invest in shares and not in mutual fund units.

Common investment approaches

While smallcases and mutual funds are quite different, there are a few similarities as well. Both are baskets of stocks, although mutual funds may also invest in bonds and other assets. Both aim to diversify the investor’s money across a selection of stocks. Both take the help of experts and research to identify investment avenues.

Smallcase vs mutual funds

In the Smallcase vs mutual fund comparison, we can see that there are several ways in which one differs from the other:

What the investor owns: Smallcase investors have an ownership right over the shares that are part of the smallcase portfolio. A mutual fund investor owns units of the mutual fund scheme, which in turn invests in shares and other assets.
Cost of investment: Smallcase brokers charge a small percentage on every transaction, generally 0.2%. It is a cheap way of investing in shares. Cost-wise, how to invest in smallcase is roughly the same as investing in shares on your own. Asset Management Companies (AMCs) deduct an expense ratio on the investments you make in mutual funds. This is a significantly higher percentage (around 1%-2%). The total expense ratio in direct mutual funds is lower than regular plans by around 0.5%, although it varies from scheme to scheme.
Minimum investment: With smallcases, you invest in individual shares. Therefore, your amount of investment would be higher, depending on the market price of the shares you purchase. Smallcases of smaller values can be around Rs 5000, while others can go up to six figures. An investment in mutual funds is comparatively less capital-intensive. If you opt for a Systematic Investment Plan (SIP), the minimum investment can be as low as Rs 500. Mutual funds are better suited for small investors.
Control over investment: Smallcase investors have their shareholding reflected in their demat account. Therefore, they have better visibility over their investments and control over their exit strategy. In a mutual fund, you don’t have active control over the investments. The fund manager invests on your behalf while you can only choose the type of scheme at the onset.
Exit load: Smallcases don’t have any exit load or lock-in period. Investors can enter and exit smallcases at will without having to worry about charges and penalties. Mutual funds (though not all of them) may have a lock-in period. Besides, there may be an exit load of 1%-2% if the MF investor redeems the investment during the lock-in period, typically one year. The lock-in period for Equity Linked Saving Scheme is three years.
Returns and risk: Due to a leaner approach, smallcase investments are more exposed to market volatilities. Past performances of the shares are not an assurance of their future returns. So, the smallcase investor has to monitor their investments and decide on further investments or exits accordingly. They have to understand what is smallcase investment and how to invest in it optimally. Smallcase investments are not as diversified as mutual funds and don’t adopt any hedging strategies. Mutual funds are comparatively more aligned to the market as the fund manager actively changes the holding pattern in response to the market movements. Besides, mutual funds also hedge with gold and derivatives to cushion market risks.

While smallcases are a recent phenomenon and their returns are reflective of the stock portfolio's performance, here is the indicative return of a selected sample of moderately risky equity funds.

indicative return of a selected sample of moderately risky equity funds.

Last words

As vehicles of selective investment, both smallcase and mutual funds serve the financial goals of different investors. An active investor looking for more involvement in the share market will prefer to invest in the more transparent smallcases. Someone looking to invest passively while relying on the expertise of the fund manager will choose mutual funds.

Mutual funds are also a better choice for small investors as they require a lower capital outlay. A confident investor who is happy to take the risk while maximising returns, and seeks lower investment cost while doing so, would prefer smallcases. Both smallcases and mutual funds are, therefore, good investment options. The choice would depend on your specific investment strategy, goal, and risk appetite.

Disclaimer: This article is intended for general information purposes only and should not be construed as investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.

Common investment approaches

Smallcase vs mutual funds

In the Smallcase vs mutual fund comparison, we can see that there are several ways in which one differs from the other:

What the investor owns: Smallcase investors have an ownership right over the shares that are part of the smallcase portfolio. A mutual fund investor owns units of the mutual fund scheme, which in turn invests in shares and other assets.
Cost of investment: Smallcase brokers charge a small percentage on every transaction, generally 0.2%. It is a cheap way of investing in shares. Cost-wise, how to invest in smallcase is roughly the same as investing in shares on your own. Asset Management Companies (AMCs) deduct an expense ratio on the investments you make in mutual funds. This is a significantly higher percentage (around 1%-2%). The total expense ratio in direct mutual funds is lower than regular plans by around 0.5%, although it varies from scheme to scheme.
Minimum investment: With smallcases, you invest in individual shares. Therefore, your amount of investment would be higher, depending on the market price of the shares you purchase. Smallcases of smaller values can be around Rs 5000, while others can go up to six figures. An investment in mutual funds is comparatively less capital-intensive. If you opt for a Systematic Investment Plan (SIP), the minimum investment can be as low as Rs 500. Mutual funds are better suited for small investors.
Control over investment: Smallcase investors have their shareholding reflected in their demat account. Therefore, they have better visibility over their investments and control over their exit strategy. In a mutual fund, you don’t have active control over the investments. The fund manager invests on your behalf while you can only choose the type of scheme at the onset.
Exit load: Smallcases don’t have any exit load or lock-in period. Investors can enter and exit smallcases at will without having to worry about charges and penalties. Mutual funds (though not all of them) may have a lock-in period. Besides, there may be an exit load of 1%-2% if the MF investor redeems the investment during the lock-in period, typically one year. The lock-in period for Equity Linked Saving Scheme is three years.
Returns and risk: Due to a leaner approach, smallcase investments are more exposed to market volatilities. Past performances of the shares are not an assurance of their future returns. So, the smallcase investor has to monitor their investments and decide on further investments or exits accordingly. They have to understand what is smallcase investment and how to invest in it optimally. Smallcase investments are not as diversified as mutual funds and don’t adopt any hedging strategies. Mutual funds are comparatively more aligned to the market as the fund manager actively changes the holding pattern in response to the market movements. Besides, mutual funds also hedge with gold and derivatives to cushion market risks.

While smallcases are a recent phenomenon and their returns are reflective of the stock portfolio's performance, here is the indicative return of a selected sample of moderately risky equity funds.