Along the way of your investment journey, the odds of encountering ups and downs are quite plausible. This is why doing your homework well is essential: it minimises the risks and will almost help avoid further pitfalls. Remember, owning different types of stocks in your portfolio is the first step in going about investing in securities the right way. It helps you distribute the risk across various stocks so that if one doesn’t perform as expected, other securities in the portfolio can compensate for it. One such investment option is a smallcase investment. However, as with any investment, there are risks involved, and you must know them before moving ahead. Let’s take a look.
What is Smallcase Investment?
Smallcase investments are portfolios or baskets of Exchange Traded Funds (ETFs) or stocks professionally designed to reflect an idea, theme, or investment plan. Investment platforms, investment advisors, asset management companies, and brokers create these diverse portfolios after extensive research.
To invest in smallcase stocks, you must open a brokerage account and own stocks from various companies. You will also need a Demat and Trading account for the purpose. The likes of Axis Direct 3-IN-1 offer these two accounts and a savings account in one for your convenience. After completing the transaction, you will receive the stocks in your Demat account and have the money deducted from your Trading account. These stocks have a specific lock-in period, which means you can hold or sell them as needed.
In 2019, the SEBI increased the minimum investment amount from ₹ 25 Lakh to 50 Lakh for portfolio management services. The hike gave a windfall to fintech platforms that provide tailored portfolios to investors. Another windfall arrived during the pandemic when numerous Indians resorted to the stock market. In FY21, the stock market received more than 14.2 million new Demat accounts compared to an average of 4.3 million in the last three years.
Risks Involved in a Smallcase Portfolio
Here are a few risks you need to look out for in a smallcase investment:
Small Ticket Sizes: RAs (Research Analysts) and SEBI-Registered Investment Advisers find it challenging to offer personalised service to smallcase subscribers that regular clients deserve.
Tax on Rebalancing: Unlike mutual funds with tax-free rebalancing, smallcase rebalancing might attract taxes. Whenever you rebalance a smallcase, it attracts tax liabilities. Depending on the length of stock holding and the profits earned, you will need to pay taxes on your capital gain.
No Charges Adjustment: Unlike MF net asset value, the net of various expenses, the portfolios’ past returns appear on the platform without charges adjustment.
Concentrated Portfolio: The smallcase portfolio can get quite concentrated without SEBI’s guidelines on diversification.Since the platform has a few smallcase stocks built on a particular company, it limits your portfolio to only one business. Therefore, it does not meet the purpose of portfolio diversification.
Higher Investment Cost: The investment cost is high if you invest an amount of less than ₹ 1 Lakh. Smallcase investment is only worth it if you plan to invest more than ₹ 1 Lakh. Otherwise, stick to mutual funds with low investment costs.
High Skill Required: If you are a passive investor or beginner, there may be better choices than smallcase stocks.
Setting the Right Risk Appetite for Smallcase Portfolio
Want to set the right risk appetite for smallcase? Here are a few tips to follow:
- Invest Only the Surplus Money You Can Put at Risk: Consider investing in smallcase stocks only if you have spare cash. Although smallcase managers keenly overview the portfolio and perform risk management, equity investments still come with significant risk. Rather than worrying about market swings with these investments, examine your smallcase portfolio’s alignment with your investment goals and rebalance as required. It will help your portfolio to stay on track within your comfort zone.
- Invest Based on Your Goals: The best technique you can follow is investing based on your goals. Sort your investment goals into long-term, medium-term, and short-term, and decide your asset allocation accordingly. Your smallcase investment should play out in the market or offer capital protection for different term goals.
- Gather Knowledge: Gather knowledge and understand the negative and positive impact of smallcase investment to enhance your risk appetite. Research customised smallcase stocks for your risk appetite and beware while making an informed decision.
- Use Your Trading Experience: If you have invested in a smallcase earlier and achieved success, you will likely purchase it again. However, has your risk profile changed since the last time? Make an informed decision based on your investment goals and risk appetite.
Smallcase investment is a collection of stocks representing a common concept, approach, or subject. By allocating different weights to the participant equities, they maximize your gains and diversify your portfolio. If you are an investor, find a smallcase tailored to your requirements, investment goals, and risk appetite.