Investing can be a daunting task, especially with the number of options available, and every investor is trying to find his/her ideal investing style. A lot of thoughts go into your mind while making an investing decision, like, should I opt for the safety of debt instruments or go for high-risk equity options? Should I add an ETF portfolio to my investment basket? How long should I remain invested? and so on.

Remember, there is no one-size-fits-all approach to investing. Portfolio diversification can address most of your investment queries, as it will protect you from the volatile nature of stock markets and allow potential returns during the investment period.

This article explores two investment avenues which will diversify your investment basket: Mutual Funds and Smallcase. One is a traditional household name whereas the other is a recent phenomenon gaining huge traction, especially among the younger generation.

Let’s delve deeper into the functioning of these asset structures and understand the key differences between smallcase vs mutual fund.



What is a Mutual Fund?

Mutual Funds are traditional investment options that create a corpus by pooling funds from many investors. This corpus is invested in different asset classes, like stocks and bonds. Asset Management Companies (AMCs) hire professional fund managers to manage the entire investment. Fund managers invest the pooled money in different securities as per the aims and objectives of the Mutual Fund mentioned in the prospectus.

Advantages of Investing in Mutual Funds

The benefits of investing in Mutual Funds are as follows:

1. Diversification: Mutual Funds offer a diversified investment basket spreading out the risk across different industries and securities.

2. Economies of Scale: As fund managers buy and sell securities in large volumes, the per-unit cost is much lower than what one may incur in retail investing.

3. Variety of Products: There are different categories of Mutual Funds like equity funds, debt funds, hybrid funds, tax savings finds, etc. Investors have a lot of options and they can choose as per their financial objectives.



What Do You Understand by Smallcase?

Smallcase is a new investment idea that allows greater control over investments than Mutual Funds. It is a bundle of securities that invests in a particular theme or strategy. The capital allocation structure of Smallcases is similar to that of portfolio management services (PMS). Recently, the popularity of Smallcases has soared, especially among the younger generation with higher disposable income.

A Smallcase investment plan allows investors to acquire a bunch of stocks or ETFs directly into their Demat account. This investment model focuses on a particular theme, such as electric mobility, IT, oil and gas, etc. The investor must decide whether he/she wants to stay invested or move out, depending on the prevailing market conditions.

Smallcase platforms provide regular rebalance updates, advising investors on what to do. Registered Investment Advisors (RIAs) registered with the SEBI have the sole authority to manage and control Smallcase investments.



Advantages of Investing in Smallcase

Here are the benefits of investing in Smallcase investments:

1. Greater Control: Investors have complete control over their investments and can time the exit as per their goals.

2. No Lock-in Period: Smallcase investments are highly liquid as there is no lock-in period and one can sell anytime they want without incurring penalties.



Key Differences Between Smallcase and Mutual Funds

1. Control

Smallcase: Investors have greater control over their investments as securities are credited to their Demat account. They have full freedom to hold or exit the securities.

Mutual Funds: While investors can choose the type of fund, the ultimate control of staying or exiting a security lies with the fund manager.

2. Risk

Smallcase: Higher risk because of minimal diversification and exposure to equity markets.

Mutual Funds: Lower risks because of portfolio diversification and management by professional managers.

3. Investment Amount

Smallcase: The initial capital requirement is high as investors need to buy at least one share of all companies to create a portfolio.

Mutual Funds: The minimum amount in a Mutual Fund via SIP can be as low as Rs 500.

4. Exit Load

Smallcase: No exit load.

Mutual Funds: Have an exit load of 1% if the units are sold within a year. This might vary based on the holding and scheme investor chooses.

5. Volatility

Smallcase: High degree of volatility as they are concentrated in theme or industry.

Mutual Funds: Lower volatility, with investments spread across various segments within an industry.



Smallcase or Mutual Funds? Which Is Ideal for You?

Choosing between Smallcae and Mutual Funds depends on the knowledge you possess, risk appetite, investment goals and more!

As you are in direct control of Smallcase investments, you require complete knowledge and understanding of how the market functions as you will have to take a decision about entry and exit in a stock. However Mutual Funds are passive investment options suitable for those who lack stock market understanding or time to actively monitor stocks.

If you have a high-risk appetite, you can go for Smallcase investments. These investments are highly volatile but also give you a chance to earn high returns. On the other hand, if you have a low risk appetite, you can choose debt Mutual Funds, offering low returns but stable investments.

A balanced and prudent approach is important for successful investment. If you are not sure about which option to choose, consult a financial advisor to align with your financial aim and objectives.

Wrapping Up

Smallcases and Mutual Funds share a similar underlying concept: both invest in a portfolio of securities to facilitate capital appreciation for investors. However, the primary distinction lies in how these two products operate. While Mutual Funds offer the diversification necessary for a balanced portfolio, Smallcases provide customisable investments based on simple ideas that have the potential for greater returns over an investment timeline.

FAQs

1. Is SIP available for Smallcase?

Yes, you can set up SIPs for your Smallcase investment. SIPs are allowed for both new and existing Smallcase investments.

2. Do Smallcases offer higher control than Mutual Funds?

As securities are directly credited into your Demat account, Smallcase offers greater flexibility and control to manage your investments. Mutual Funds are managed by fund managers who make decisions on behalf of investors.

3. What is the disadvantage of investing in Smallcase?

One of the biggest disadvantages is the need for knowledge of financial markets and industry segments. Moreover, active management of holdings is required.

4. Can I exit from Smallcase anytime?

Yes, Smallcase investments have no lock-in period, allowing you to exit anytime.

5. Is prior knowledge required to invest in Mutual Funds or Smallcase?

Investing in Smallcases requires knowledge of stock market, as investors have control of the portfolio when it comes to buying and selling of the securities. While investing in Mutual Funds, do not need extensive knowledge as your portfolio is managed by experts.