Smallcase vs. Mutual Funds

Mutual Funds involve asset management companies (AMC) pooling in money from different investors who have a common investment objective, to buy securities such as stocks, bonds or assets. Any gains or income generated from investments, is divided proportionally amongst the investors, after deducting expenses which are calculated by the mutual fund scheme’s net asset value (NAV).

A smallcase on the other hand, is a basket of stocks which you order and own directly, based on your idea, strategy or portfolio theme and objectives.

Some key differences between smallcase and mutual funds:

1. Ownership and Returns

In smallcase, one has direct ownership of the stocks purchased and it reflects in a demat account. All dividends are then transferred to one’s bank account.

Mutual funds on the other hand own a pool of stocks and we as investors, invest in the units of a mutual fund scheme. This is an indirect ownership of securities which reflect in one’s bank account on a quarterly basis.

2. Taxation

Smallcase and equity mutual fund investments are both taxed similarly. A Short term capital gain (STCG) tax rate of 15% applies for investments held for less than one year. A Long term capital gain is taxable at 10% once capital gains exceed INR 1,00,000.

The only difference is that equity linked savings schemes (ELSS) can be tax exempt when investments are up to INR 1,50,000 per financial year, according to Section 80C of the Income Tax Act 1961.

3. Control

In smallcase, the investor has more control over the individual stocks bought in a basket. Since rebalancing occurs frequently in smallcase, an investor has the option to tweak their portfolio when they choose to, by buying or selling stocks according to what the market demands.

Mutual funds offer limited flexibility in controlling one’s securities. Since it is a unit purchased within a scheme, an investor does not have control over individual stocks. They may only opt to change the entire scheme rather than singling out a particular stock.

4. Exit Load

Smallcase investments do not have any cost of leaving or a lock in period. Mutual funds on the other hand, will charge a percentage of the NAV as the exit load for leaving before the lock in period. Typically, a lock in period can vary between 1-5 years, depending on the selected scheme.

5. Active vs. Passive

Active: If you are someone who enjoys a slight DIY approach to investing and like to categorise your portfolio by theme, strategy or idea, then smallcase might be good for you to consider. Here, you simply pick a theme of stocks for your basket order and do not have to worry too much about market research, as it is done by SEBI-registered professionals. You have more control in tracking market updates and stock performances live and can exit from your decisions at any time.

Passive: If you are more inclined towards diversification without the hassle of tracking the market, then mutual funds may be the option for you. Here, you start with an objective for your portfolio and pick a scheme which fits that investment objective. The rest is handled by fund managers - including any fees, taxes, tracking and returns.