Difference between smallcase and mutual fund

When it comes to growing your capital, investors in today’s world are offered so many choices, be it index funds, debt funds, ETFs, etc. All this creates a sense of doubt in investors as to which investment option to pick to maximize their portfolio’s profits. As every investment option comes up with its pros and cons, it becomes difficult for one to know which one to settle for. 

In this blog, we will be talking about two among these investment options, that is, smallcase vs mutual fund. We will be seeing the difference between smallcase and a mutual fund.

What is a smallcase?

A smallcase is simply a collection of stocks. A SEBI-registered manager is assigned to the task of creating a smallcase. The small cases can be based on different themes. The smallcase manager with his/her expertise picks up the stocks according to which type of smallcase it is. 

Smallcases are classified on different bases, for example, market sectors, themes such as a smallcase can be created containing the stocks of the pharma sector only, similarly, we can create an automobile sector-related smallcase too.

In smallcase, the stocks are directly added to one’s demat or trading account, just like a normal share. Smallcase may integrate directly with your broker account, providing a seamless investing experience.

Advantages of smallcap Investing

1. More themes available – In smallcase investing, the fund managers are more open to picking up sectors and themes that are fresh and currently in trend.
2. Regular rebalancing – Stocks in the smallcase portfolio are regularly monitored and updated by the managers according to the markets in order to maximize the profits.
3. Direct Integration with Demat Account – The smallcase is made in such a way that it integrates directly with your broker account seamlessly, so that you can keep track of your investments more easily.
4. Create your own Smallcase – In Smallcase, you do have the option to create your basket of stock instead of solely depending on the Smallcase management, thereby enabling us to customize our portfolio of stocks more easily.

What is a mutual fund?

A mutual fund is you can consider like a basket of stocks. Multiple stocks are picked together and put together collectively. For analogy, we can think of a basket of fruits. Instead of eating the same fruit again and again, we can choose to make a basket of different varieties of fruits, which will ensure we get the dietary benefits of different kinds of fruits.

Similarly, in mutual funds, we have different types of stocks, which help us to provide diversification in our portfolio. The mutual funds can be categorized using many different strategies. Stock picking for mutual funds can be done based on the market caps, specific industries, and geography.

For example, we have Large cap Mutual funds, containing the stock of companies which are among the top in the country based on their market cap; similarly, we have midcap, small cap funds too. Flexi/Multi-Cap mutual funds are those in which the fund manager has the flexibility to pick stocks from different sectors. The grouping of different caps, different strategies is decided and done by the particular Fund manager of the Asset Management company (AMC).

Mutual funds do not trade on the stock exchanges like stocks do; instead, we need to buy the units of a mutual fund through an Asset Management company (AMC). The price of mutual fund units are based on NAV (Net Asset Value), which in turn depends on various factors such as the AMC charges, the number of investors etc.

Broadly, mutual funds are divided into two categories : 

• Active Mutual Funds – In this category, the mutual fund’s portfolio is actively managed and updated by the fund manager of AMC regularly.
• Passive Mutual Funds – In here, the fund manager usually just replicates the already-made basket of stocks available in the market. This already made basket of stocks is known as the INDEX. Fund managers just try to replicate the indexes in their portfolio without much of their own regular active participation.

Advantages of Mutual Funds 

1. Diversification – Mutual funds are created in such a way that people will be able to get exposure to different sectors/industries in a single fund. 
2. Better Volatility Handling – As mutual funds tend to provide better diversification than a single stock, they are better at handling market ups and downs. As and when one sector goes down, the other sectors in the mutual fund may compensate for it.
3. Start Small – Investing in mutual funds is an easy procedure;  one just needs to verify their KYC credentials, and they can even start with as little as 100 Rs. This amount varies among different fund companies.
4. Cost Averaging – In mutual funds, we have options to invest periodically (through Systematic Investment Plan – SIP) or a lump-sum amount investment. Usually, if we choose to go through the route of SIP, we invest at regular intervals, which ensures that the ups and downs are averaged out if we tend to invest for a longer duration of time. That is, there will be times when we will invest during lows of the market and similarly during highs of the market. If we calculate the returns after a certain period, then it will come as an average of all the investments we have made, in which the lows of the market will be made up by the highs.

Difference between smallcase and mutual fund

	MUTUAL FUNDS	SMALLCASE
Definition	A collection of stocks grouped in a single fund	A basket of stocks collected together in a single group is known as a smallcase
Unit Allotment	Mutual fund units are allotted to the folio (MF account) of a user, which is usually created through an AMC	Unlike mutual funds, smallcase units or shares are directly credited into your trading account
Customizability	Mutual funds are not usually customizable, as the fund managers only create the whole fund at once.	Smallcase is more customizable when compared to a mutual fund., You can either pick from the already-made smallcases, or even create your smallcase
Expense Ratio	Mutual funds have a lower expense ratio, generally in the case of passive index funds, but in active mutual funds, it can range a little higher	Smallcase has a range of expense ratios; it can be super low, especially when we create our smallcase, and a bit higher based on the type of smallcase we are choosing
Liquidity	As units are held in the AMC folio, it usually takes a little more time as compared to a small case for unit redemption.	In Smallcase, shares are present in your demat account; therefore, you can sell them at any point in time instantly.
Exit Load	Mutual funds usually have exit load criteria based on the time duration you are invested.	Small cases do not have any exit load charges.

Conclusion

Both smallcase and mutual funds are powerful investment tools. They have a common principle that they both are a collection or a basket of stocks. But they cater to different types of needs, as mutual funds are a more robust, old, and widely used investment tool. Mutual funds can be opted for when one needs more professional expertise, and smallcaps, on the other hand, also have experts, but they tend to be more customizable than mutual funds. Ultimately, the decision of which one to pick should align with your financial goals, risk appetite, and investment knowledge.

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Disclaimer

This content is for informational purposes only and does not constitute financial advice. Please consult a qualified professional before making a financial decision.

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