There are certain terms that we use interchangeably in our daily lives, but which have altogether different meanings. The most classic example is between the words turtle and tortoise. While we perceive both organisms to be somewhat similar, they both have entirely different characteristics.
This happens in the investment world as well. There are various terms that investors use interchangeably, without knowing the true meaning and the difference. Investors might not understand the difference between an equity share and a preference share, an exchange-traded fund and an index fund, and so on. So today, we’ll discuss two such terminologies. We’ll discuss about mutual funds and smallcase, and eventually, compare them.
What are Mutual Funds?
A mutual fund is a pool of money managed by a professional fund manager. It is a trust that collects money from a number of investors who share a common investment objective and invests the same in equities, bonds, money market instruments and/or other securities.
And the income/gains generated from this collective investment are distributed proportionately amongst the investors after deducting applicable expenses and levies, by calculating a scheme’s “Net Asset Value” or NAV. Simply put, the money pooled in by a large number of investors is what makes up a Mutual Fund.
What is Smallcase?
Smallcases are portfolios of stocks or ETFs that are made to track a theme, strategy, or objective. They are modern investing products based on simple ideas that you understand. They are backed by solid research and are created by India’s leading finance experts. Small cases are fully customizable and you can edit your small case constituents any time. You can invest with various brokers that small case supports.
Comparison between Mutual Funds and Small Case
The following are the differences between the two
Ticket Size
In the context of mutual funds, investors can start investing with an amount as small as ₹100/500. Whereas in smallcase, the minimum amount of investment will depend upon the small case you choose to invest in. It can range from ₹500 in some cases and can also go up to ₹2 lakh in some.
Order
To invest in a small case, an investor needs to have a trading and Demat account. A small case can be accessed through the broking account. However, to invest in mutual funds, an investor is not required to open a Demat account. They can be purchased from a mutual fund distributor or from the mutual fund house directly.
Diversification
A small case is an instrument which invests in a basket of stocks, which is generally focused on a theme. Majorly, these are concentrated investment portfolios. Thus, in a small case, investors are taking in additional risk as compared to a diversified portfolio. But to further diversify, investors can invest in multiple small cases. Investors also need to keep a track of all the rebalancing activities taken by the small case they are investing in.
In the context of mutual funds, the case is different. Here, investors have a choice of investing in a diversified portfolio or a concentrated one. In this regards, mutual funds offer better opportunity for diversification to investors.
Fees
The investment amount contributed by mutual fund investors is managed by a professional investor, who charges a fee for his skills. The expense ratio on mutual fund schemes can be as high as 2.5%. But this metric is lower for direct schemes. And recently, the Securities and Exchange Board of India (SEBI) has directed mutual fund houses to lower their expense ratios as and when their Assets under Management (AUM) reach certain levels.
With small cases, some of them are available for free, but others charge a one-time nominal fee based on the broker.
Time
In mutual funds, the fund manager makes changes in the investment portfolio. He decides everything for you. Once an investment is made, you do not need to actively track your investments.
However, with smallcase, investors need to keep a track of changes and execute them in a timely manner. In comparison with mutual funds, investing in smallcase requires more active participation.
Unit vs Shares
When you invest in a small case, you get securities in your Demat account. When you buy an IT-focused small case, you get shares of IT companies in your Demat account.
In contrast, mutual fund schemes invest in stocks, bonds, and alternative investments and investors are allotted units of schemes.
Which is better Smallcase or Mutual Funds?
If you are looking for a yes or a no, there is no definite answer. Keeping in mind the above points, investors can decide where to invest according to their preferences. For instance, an investor who wants a diversified portfolio of stocks and has a limited investment amount can invest in a mutual fund scheme as compared to a small case.
But wherever an individual invests, proper due diligence should be done.
Conclusion
Discussed above were some of the subtle differences between mutual funds and small case as an investment avenue. Investors can consider their preferred asset class by simultaneously comparing the risks and returns.
