scorecardresearchThere is more to small-case investments than what meets the eye

There is more to small-case investments than what meets the eye

Updated: 05 May 2022, 08:29 AM IST
Before you invest in small case investments, check how they perform. Then learn other factors important for decision making including subscription fees, costs involved and return expectations. Taxes on gains to be paid every year is another component that cannot be ignored. 
Parking money in small case investments.

Parking money in small case investments.

The key to wealth creation is to invest in ideas. And this is exactly what small-case investments are all about. If you are not sure which sector to invest in or investments in which stocks would yield you maximum returns, you can benefit from the experience of professionals running small case investments. Many retail investors are now excited at the prospect of putting money in these owing to the novelty of the concept.

You can start with a basic investment of 50,000 that can go up as you park your money further in the market. Both the amount and number of investments go up as you realise the perks of seeing your investments decided and curated by a group of professionals. Furthermore, you are sure of what you own because of the holdings credited to your Demat account.

Some small case investments have beat the market returns through momentum strategies, thus, gaining attention among many new investors. The ease of subscribing to them coupled with the benefit of being able to buy an entire portfolio with just one click and then seeing the transaction happen in real-time has enticed many people to allocate a part of their earnings to them. All said and done, are small case investments really worth your investments? What are the aspects that you must consider before diving straight into small case investment options?

If you are reconsidering your decision to subscribe to a small case or think that you have found the perfect small case to put your money in, the following is the list of factors you must consider before investing in any of them.

The cost factor

You have got to pay for a product or service that you use or avail. This means that the pricing of service matters before deciding to pay for it. Investors will always look at returns minus the costs. However, the biggest cost component in small case investments is the subscription fees. These can be paid either monthly, quarterly, half-yearly or on an annual basis.

Now that you have paid the fees, you must earn returns big enough to recover your costs. The absolute returns that you earn on your portfolio must be either equal to or more than the costs, which means that you must recover your costs before seeing any gains.

Let us understand this with the help of an example.

Assume that you are a newbie investor who has taken a fancy to park money in small-cases. The minimum subscription fee is 15,000 while you are allowed to invest a minimum of 50,000 in it. This means that your portfolio has to earn at least 30 per cent just to recover the costs. The market-related returns vary between 12 and 15 per cent. Thinking of the frequency of churning and rebalancing it would require earning 30 per cent to just recover the cost.

Some people insist that the subscription fees charged by small case investment companies must be similar to that charged by mutual fund houses. These houses are not allowed to charge beyond two per cent of the assets under management (AUM). To have an expense structure similar to mutual fund houses, you would have to invest at least 7,50,000 so that the cost of your investment does not exceed 15,000.

There is no point in investing in reputed small case investment companies that charge subscription fees equal to or more than 10,000 if your investment is below 100,000. Choose the small case company that does not charge more than 3-5 per cent of the investment amount.

Return expectations

You should not be dreaming of earning millions at one go by parking money in small case investments. Apart from costs, you must be careful to look at it from the point of view of investments, too. The bull run before June 2021 had helped many investors to earn handsome returns. The markets toppled, fell several times, and rose a few times only to move sideways lending confusion and instability among investors. What remained is the investors’ confidence and hope that they will be able to ride the market movement and earn similar returns. The veterans who shorted their investments well in time gained while others kept waiting for the bull run only to see their portfolio in red. Moreover, return expectations became unrealistic after having experienced a boom and rise in continued succession before 2021.

Keep your returns realistic. Do not extrapolate short-term returns over a long period with the anticipation that the markets would move as planned. This does not happen. Corrections in the market are normal and not too infrequent. This means that you will also experience recurring phases of negative returns, wherein the value of your equity instruments can go down by a huge margin. If you are the kind of investor that panics every fall, small case investments may not be apt for you.

Taxes are unavoidable

A wise man once said, “There is no escaping death and taxes.” With investments in stocks, be it through small cases, paying transaction costs also becomes imperative.

Many investors complain about how the taxation rules between mutual funds and small case investments vary. This is because mutual fund investors are liable to pay taxes on the gains earned only when they exit their investments. However, the same is not true for investors rebalancing their small case investments. If you are buying and selling the stocks in your account frequently, you will have to pay short-term capital gain tax (STCG). However, if you prefer to buy and sell, which means that you keep the stocks for more than a year in your account before you decide to sell, long-term capital gain tax (LTCG) on gains over and above 10 per cent of the earning would be applicable.

Paying transaction costs

There is a frequent rebalancing of stocks in small case investments. This is done to ensure the original weight of the stocks predetermined in the portfolio. Apart from the portfolio’s stocks that are bought and sold, each rebalancing requisites some small buys and sales of the stocks. This triggers a levy of brokerage and transaction tax too. Apart, each sale triggers a depository participant charge that remains the same, be it the sale of a single share or 1000 shares.

Too much information at bay

Excess information can create both unwanted and unwarranted confusion. Small case investors benefit from the ability to see how their stocks are performing in real time. With one click needed to buy and sell, this benefit has caused many investors to participate in the market through small case investments. However, news of profits earned by their peers and the ease of navigating between small case investments may prompt many to leave one for the other. This sudden hit of dopamine may affect the chances of earning returns in the long run. If you are planning to invest in small case investments, make sure that you have your priorities right. More than just profits, you must look at the sectors you wish to invest in or your long-term financial goals.

A journey through the stock market involves a lot of research and understanding of stocks. You must be aware of the fundamentals of a company before you decide which shares to buy. Knowledge of technical details is needed to check for volumes and appropriate selling strategies. Parking money in small case investments eases the journey of stock purchase and sales. Just invest and rely on a set of portfolio managers than spend time finding and picking individual stocks. But then unrealistic expectations and the burden of costs and added payments may destroy the joy of trying out small case investments.

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First Published: 05 May 2022, 08:19 AM IST