The term ‘smallcase’ is gaining popularity among digitally savvy investors. As such, Smallcase Investment may be compared to portfolio management services (PMS) for retail investors, where there is no such high entry barrier as the Rs 50 lakh investment fee that PMS charges.
Smallcase: What is it?
Retail investors should take note of the exciting new phenomenon of smallcases. A smallcase invests in a basket of stocks or ETFs that is selected by either the smallcase team or independent advisors.
Using Smallcase, you can build your own portfolio or subscribe to one, then place an order to buy the whole portfolio in one click, see the transaction in real-time, and monitor performance.
When you need to update your portfolio, a smallcase notification (also sent over email) notifies you. Logging into the account, clicking the ‘Rebalance’ button, and confirming the transaction. Your regular trading account places the relevant buy and sell orders through smallcase, and confirmation is provided when the transactions are executed.
How is investing in smallcase different from investing in mutual funds if the goal is to buy baskets of stocks?
What makes it different from a thematic mutual fund (MF)?
One difference between mutual funds and small cases is that one owns the units of the mutual fund, whereas one owns the underlying stock in a mutual fund.
You can visit the website. It’s a Bengaluru-based company that was started by three IITians in 2015. The service was launched in 2016. Investors are connected to portfolio managers who curate these specific baskets of smallcap stocks based on their research expertise, and then investments are made through brokers who are linked to the platform, which is Smallcase.
Therefore, this is a meeting between three stakeholders.
What to consider before starting the smallcase investment in 2022
Here are five things new investors should definitely consider when evaluating whether to subscribe to a smallcase or decide which is the best smallcase to invest in.
1. Cost versus investment
The return on investment is important, net of costs. The subscription fee, the largest cost component in smallcases. The fee normally paid monthly, quarterly, semi-annually, or annually.
If your portfolio appreciates by this amount, you will be able to recover your costs before you see any gains.
For example: You will have to earn 30% return on your investment to even recover the cost of accessing that smallcase if you invest the minimum ₹ 50,000.
2. How realistic are your return expectations?
Most likely, they aren’t. The reason to pause before subscribing to a smallcase is a corollary to the point about costs.
By June 2021, many smallcases have shown great performance over the last 12-18 months.
Extending your expectations from investing in any equity strategy into the distant future will almost certainly leave you disappointed. It is almost certain that equity strategies will have periods of negative returns. Smallcases are not for you if you are likely to panic if your portfolio drops 10%.
3. Taxes, transaction costs, and slippage add up
Someone wise once said that there is no escaping Death and Taxes. They always adds transaction costs to that list.
Taxes: Gains realized by a mutual fund when an investor buys and sells shares are not taxable. Upon exiting the investment, the investor is only liable to pay taxes. Rebalancing a small case is different. Gains from short-term taxable investments taxed at 15%. As a smallcase that rebalances frequently can only match a buy-and-hold strategy, it needs to deliver a good 500 basis points (5% return) higher than the NIFTY.
Transaction costs: smallcase rebalancing requires transactions to restore the weights to their original state. Additionally, each rebalance triggers small buys and sells for the other stocks besides the specific stocks bought and sold. STT (Securities Transaction Tax) is applicable to brokering. Depository participant charges also added to each sale. There is a Depository Participant Charge of ₹13.5 + GST irrespective of the volume of stock sold, whether it is one share or a thousand.
Slippage in execution: As smallcase places market orders, rather than limit orders, there is a real possibility of slippage negatively affecting the price at which you buy or sell, especially for large volume orders.
4. Expect the unexpected – Be prepared
Orders for Buys and Sells don’t always go as planned. It is important to determine why and to take the appropriate action.
Here are the two most common reasons why smallcase rebalances fail:
Error message: Stocks that have hit the upper limit (when you try to buy) or the lower limit (when you try to sell) will return an error message. This means that the stock you’re buying has no buyers at that price, or that the stock you’re selling has no sellers at that price. Smallcase has no stake in this, but rather the stock’s availability for sellers and buyers on the exchange.
If the stock traded again, the smallcase needs repairs to complete the rebalancing.
Buying or selling certain shares requires TOTP enabled: Some brokerage firms add additional steps to the process. Exchange surveillance lists typically include such stocks. The only way to buy or sell stocks on this list typically through a brokerage account with OTP-based login enabled.
Smallcase investment is easier than picking individual stocks. It is beneficial to have professionally researched stock baskets on a variety of topics. Nonetheless, it is the investor’s responsibility to be aware of the costs involved and to understand enough so that they do not overpay. After all, it is your money.
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