What Are Smallcase Funds? How Are They Different from Mutual Funds?

A diversified portfolio benefits investors by minimising the risk of loss, assuring increased returns, and safeguarding against adverse market conditions. Investors can invest in a wide range of stocks on the basis of sectors and market cap (small-cap, large-cap and mid-cap). However, individuals can also invest in a new investment instrument known as smallcases. Budding investors may confuse it with mutual funds.

Read on to learn about small cases and how it differs from a mutual fund.

What Are Smallcases?

Smallcases are portfolios that include stocks or exchange-traded funds (ETFs) that are professionally customised and mirror an investment plan, theme or idea.

Smallcases combine two skills, namely finance and technology, and offer a new and unique platform for investing. In this platform, investors can design their own investment portfolio model or select from existing models that are generated and managed by the Securities and Exchange Board of India (SEBI) registered entities.

Smallcase Technologies offer Smallcase funds where brokers, investment advisors and asset management companies conduct extensive research so that they can create diversified portfolios for investors.

How Does a Smallcase Fund Work?

To invest in Smallcases, investors must open a brokerage account. As investment in small cases includes stocks of different companies, investors must have a trading and Demat account.

Here, investors can choose to invest in stocks, securities, ETFs, etc., in existing smallcase options created by SEBI registered entities, or they can customise the smallcase model as per investment strategy or theme of preference.

Currently, there are 12 of India’s largest brokers that offer small cases. Investors can log in with a broker’s ID or create their own account. Next, they have to choose a suitable theme. At this stage, they have to place an order for all stocks, including those available in the basket through brokers. After a successful transaction, the shares will be transferred to the investor’s Demat account.

In the case of smallcases, there is no fixed lock-in period for stocks. Investors can hold or sell these stocks as per requirement.

Who Should Invest in Smallcases?

Investors who want to have control over their portfolio, have comprehensive knowledge about market timing and can time their entry and exit from an investment can invest in smallcases.

This type of investment can easily attract investors. However, those who are still oscillating between smallcases and mutual funds must read the following section.

What Is the Difference between Smallcases and Mutual Funds?

Refer to the table mentioned below to understand the difference between smallcases and mutual funds.

Particulars	Smallcase Funds	Mutual Fund
Lock-in Period	No lock-in period.	Some mutual funds have a lock-in period.
Cost of Investment	Investors pay a nominal fee (e,g 0.2%) at the time of transaction.	The expense ratio of a mutual fund can go up to 1.5% -2%.
Exit Load	No exit load	Investors pay exit load if they redeem during the lock-in period.
Portfolio Diversification	Smallcases are thematic investments; hence there is low scope for diversification.	Mutual fund investment offers strategic diversification. Here, investors can choose to invest in a concentrated portfolio.
Risk Factor	Smallcases are exposed to market volatility due to theme-oriented investment, hence having high risk.	The diversified portfolio of mutual funds enables investors to reduce risks by adopting hedging strategies.
Return Volatility	Returns from smallcases depend on market volatility hence not fixed.	Mutual funds offer stable returns depending on the type of scheme chosen.
Transparency and Control	Smallcase investors can see their shareholding in the Demat account. Hence, they can control and decide exit strategies.	Mutual fund investors can select the type of investment only at the beginning.
Ownership Rights	Smallcase investments offer ownership rights of stocks of the existing portfolio.	In mutual fund investments, investors do not gain ownership of shares. They only hold units of portfolio.
Tax Benefits	Smallcase investment does not offer any tax benefit.	ELSS mutual funds offer tax benefits of up to ₹1.5. lakh under section 80C.

Small Case vs Mutual Fund- Which Is Better?

Both smallcases and mutual funds focus on wealth creation for investors. Investment in smallcase and mutual funds have both pros and cons.

In small cases, investors must have enough knowledge regarding market conditions. Additionally, they have to keep track of the changes and design exit strategies accordingly. Investors of such funds have to decide their smallcases on the basis of investment objectives and goals.

On the other hand, mutual fund investors need not worry about these as fund managers handle all these matters. Also, investors have to pay higher costs to invest in the mutual fund than in small cases.

Deciding between smallcases and mutual fund wholly depend on the investor’s risk tolerance levels, investment horizon and return expectancy. Read the details carefully to make an informed investment decision.

Frequently Asked Questions

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Do smallcases offer direct access to returns?

Yes, unlike mutual funds, smallcases offer direct access to return. In the case of smallcases, shares are rightly credited to the Demat account of investors; therefore, dividend distribution and the issue of bonus shares occur directly with investors, and they get direct access to returns.

Is mutual fund investment time-consuming like smallcases?

No, mutual fund investment is not time-consuming like small cases. After deciding on the investment mode and whether investors want to opt for SIP or not, all the tasks are delegated to the fund manager.