homepersonal finance NewsSmall case! Are these platforms a disruption in mutual fund flows?

Small case! Are these platforms a disruption in mutual fund flows?

Small case! Are these platforms a disruption in mutual fund flows?
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By CNBCTV18.com Contributor Dec 7, 2021 6:29:05 PM IST (Updated)

Small case is a platform where you get a readymade basket of shares, ETFs or direct mutual fund plans, curated by SEBI registered advisors or portfolio managers; which help you to build a low-cost investment portfolio directly.

Many investors are now taking advantage of small case platforms for focused investments and find that the process is easy, convenient and sometimes more productive. As the markets have been buoyant over last 20 months, there is a talk in a section of markets whether this alternative will be a disruption for MF flows?

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Before we prepare to answer this question, let us first understand the risk hierarchy of small case
Let us first look at a fixed deposit or fixed income investor who wants better tax effective returns. The FDs have lost their charm due to taxability and low returns. Even the returns on bond funds become unpredictable due to possibility of rising interest rates. In addition, during the waiting period of three years for tax indexation; nursing three or four percent returns is traumatic.
Finally, as an investor ventures in to the world of equity mutual funds, he is expected to start with hybrid funds or balanced advantage funds to get little better returns as compared to fixed income. Sooner or later the investor is introduced to large cap and Multicap funds and is requested to broaden his investment horizon. If the experience of this journey which may take three to five years, is satisfactory, next step is to venture in to thematic funds.
Here the advice is very important as thematic funds need well planned entry and exit strategies. Once this hurdle is passed comfortably, he is ready to venture in direct equities to supplement to his other investments.
Small case platforms are placed here in the risk hierarchy.
Small case is a platform where you get a readymade basket of shares, ETFs or direct mutual fund plans, curated by SEBI registered advisors or portfolio managers; which help you to build a low-cost investment portfolio directly. Each small case is based on a theme, strategy or objective.
There is a choice of discount brokers with whom you need to open an account to participate. Please remember, your friendly neighborhood broker cannot offer small case products
Let’s take an example to understand. You learn that Godrej properties could book sales of above 550 crores on the day of property launch at Gurgam. You may also find that real estate exposure in most diversified funds is very little or negligible. Here, you may get a small case product which may invest in real estate stocks directly, in addition to their supply chain like tiles, cement manufacturers and also the REITs.
This makes a wonderful complimentary diversification or addition and gives a ticker to your investment folio. Thus, depending on a theme, you wish to invest in, different choices are available, in pharma, information technology, midcap or small cap sectors. Some small case products follow momentum investing and in the recent Bull Run such themes gave super-duper returns.
One of the advantages of small case is direct control and possession of stocks which you wish to invest in. Also, in case a particular stock isn’t performing well, the investor can sell the shares and continue to hold the remaining part of the small case. On the contrary in case of investments in mutual funds, the portfolio is revealed at the end of the month and you are not aware of the changes made by the fund manager during the month.
When you invest directly in stocks, which get credited to your demat account, the dividends are credited to your account. In the era when dividends were tax free, this worked wonderfully. Today, with tax on dividend, mutual fund or even an insurance scheme becomes a better option.
Many times, the small case stock folios are based on algorithms and quantitative models. These are used by astute investors for momentum investing. This is not available with any mutual fund scheme. (Though quant based mutual fund schemes where fund manager interaction is minimal are available). In any case the stocks are picked through careful research.
Investors can invest in all the stocks of the small case. However, they can also make changes to the portfolio by adding and omitting a few stocks. Moreover, they can also change the weightage given to each stock. This makes the investor, his own fund manager and can reap the benefits or consequences of the same.
The biggest advantage is, no lock in period or exit load. Many a service providers charge one time entry fees, without paying which you do not know the stock basket.
Good knowledge of stocks, their valuation principles and tab on the company developments is a must for direct equity investing. If you ask information to the service provider, the advisory charges can be similar to expense ratio of a mutual fund.
The selection is also a tough task, as there are many portfolios available on small case platform. Generally, investors go by the reputation of the fund manager and his past record.
As the small case bundle of stocks is a concentrated exposure in a theme or an idea, diversification is neither desired, nor is available. The mutual funds are very convenient due to easy entry, low initial investment and various tools like SIP, STP, SWP etc. It is very difficult to reproduce a portfolio of balanced advantage or similar fund.
The expense ratio in case of mutual fund become a part of your investment amount and is easy for calculation of capital gains. In other words, the fund houses adjust the expenses in the Net Asset Value (NAV). In case of small case, weighted apportionment of advisory fees to the stocks in the portfolio may be needed as you may not exit all the stocks at one go.
When one takes the option of small case, the willingness to take the risk of volatility is assumed. This can make or break a portfolio. Mutual funds, on the other hand, have given stable long term returns in the past, growing in line with the economy. Further, fund managers constantly alter the holding with the changing market conditions. Also, some MFs are hedged with derivatives to manage market crashes.
Most importantly, in mutual funds, the cut off time for investments is 3 pm on the same day. Market may come down or go up during the last 30 minutes. Thus, timing of market is not exactly possible. While investing in small case, you can exactly time the purchase and sale.
Let us now tackle the question, whether small case can disrupt mutual fund flows. Both work on the same ideology for wealth creation. However, small case platforms come with a prerequisite of market knowledge. On the face of it, it looks impossible for small case to disrupt mutual fund flows. The convenience of mutual funds will remain. The small case at best can remain complimentary in the portfolio of a well read, savvy investor
The author, Bhushan Mahajan, is Founder, Chairman and Managing Director at Arthbodh Shares and Investments Pvt. Ltd. The views expressed are personal
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