Smallcase investment: What you should know before investing?

Smallcases offer the convenience of being able to control your investments using the expertise of seasoned market professionals. A smallcase is typically a themed basket or portfolio of stocks or exchange traded funds tailored by investment experts. Smallcases give retail investors full control to add or remove stocks from their portfolios and to create and manage baskets of their own choice.

Smallcase investment What you should know before investing

Considering the growing interest in smallcases, we have listed here a few key pointers for a new investor to keep in mind to enable them to take an informed decision while investing in a smallcase. 

Related: Which is a better investment: Smallcase or Mutual Fund?

The price you pay versus the amount you invest

The price you pay while investing in a smallcase includes:

  • Subscription Fee – paid monthly, quarterly, semi-annually, or annually to the managers and researchers who create and manage the smallcase.  
  • Transaction Fee - Charges per transaction whenever an order is placed to buy or sell
  • Brokerage Fee – paid to Zerodha, Sharekhan, ICICIDirect, etc. (This may be included in the transaction fee)
  • Demat Charges
  • Taxes – GST (buy/sell)

The amount you invest in a smallcase depends on:

  • The smallcase you choose is based on your risk appetite and the theme that appeals to you, such as IT tracker, digital inclusion, rising rural demand, etc.
  • The one which gives you the kind of return that justifies the fixed price you paid to subscribe and transact. 

For example - You buy smallcase ABC with a semi-annual subscription fee of Rs 100, minimum investment amount Rs 10,000, plus smallcase transaction charges Rs 50 plus brokerage fee, demat charges, and taxes Rs 10. Now, if you would like a return of 15% in the first year, you should take the base as 10,000 + 100 + 50 + 10 = Rs 10,160 and invest in a smallcase which gives you 15% plus returns on this amount so that you are able to offset the charges you incurred in making the investment. 

  • Also, make sure that the expense charges for the smallcase you invest in do not exceed 2-3% of the total amount you plan to invest.

Are your return expectations realistic?

Returns should always be looked at on a long-term basis. Few smallcases will be able to provide returns on investment immediately or in the short-term. There is a great variety of smallcases available to retail investors, so be sure to look through and study them before you decide on which one to invest in. 

Some smallcases may have a history of high returns but will fall in the high-risk category, while others will provide steady returns but will be lower-risk. Pick one that suits your risk appetite and returns strategy.

Transaction Costs, Slippage, and Taxes add up

Taxes – Unlike mutual funds, when you rebalance a smallcase, there are short term taxable gains (@15% STCG applicable). A smallcase which rebalances often needs to provide a substantially higher return compared to NIFTY.

Also Read: How are Mutual Funds Taxed?

Transaction cost - Smallcases get frequently rebalanced by buying and selling stocks within a basket in the short term. This incurs transaction costs associated with each buy and sell, including Brokerage fee, STT (Securities Transaction Tax), and Depository Participant Charge. 

Execution slippage - The time taken between order placement and execution may result in a change in the prices of stocks in real-time, which in turn will result in execution slippage. This often happens when buying or selling bulk stocks.

Things may not always work as expected – Be prepared

Due to market volatility and certain rules like circuit imposition, the order may not go as expected, and one needs to rebalance again. If your smallcase rebalances periodically, be sure to set up alarms and rebalance as soon as the update is sent to you, so you have the opportunity to transact at the right time and the right price.

Related: Types of Risks you should be aware of when investing

Stick to your investment strategy despite distractions/temptations 

More information more the noise. So stick to your goal-based investment strategy, and your investments will be sure to provide returns in the long term.

Related: 6 Practical Strategies to Help Reduce Investment Risks

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


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