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Looking for the best smallcase to invest in? Make sure you look at these five things first.

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Are you looking for the best smallcase to invest in for the long term in 2022? This article will help you think about how to pick one.

With a four-year live track record, Capitalmind Momentum is the longest-running smallcase with a track record to match. It has consistently been among the most popular and best-performing smallcases in 2020 and 2021.

Not every investing strategy is for everyone, so it’s essential to look beyond recent returns before investing in one. Here are five key things all new investors should consider before subscribing to any smallcase.

What is a smallcase?

smallcase is an exciting new phenomenon for retail investors. Curated either by the smallcase team or independent advisors or portfolio managers, a smallcase invests into a basket of stocks or ETFs.

After creating your smallcase or subscribing to one, you can place an order to buy the whole portfolio with one click, see the transaction happen in real-time, and monitor performance.

A notification on the smallcase app (also sent over email) tells you when a change to the portfolio is due. The user logs in, clicks the ‘Rebalance’ button, and confirms the transaction. The smallcase platform places the applicable buy and sell orders through your regular trading account.

So, if smallcase is about buying baskets of stocks, how is it different from investing in mutual funds?

Four key differences between mutual funds and smallcases:

  • You own units of the mutual funds and not the underlying stocks. In the case of smallcase, you directly own the stocks.
  • Equity Mutual funds only need to disclose their holdings once a month, so you don’t know what your fund owns at any given time (this is not necessarily a bad thing, given you have delegated the task of picking stocks to the fund manager). With smallcase, you know what you own because the holdings sit in your Demat account.
  • Buys and Sells in mutual funds do not result in short or long-term capital gains for fund investors. Since you’re directly buying and selling stocks in the case of smallcase, capital gain taxes are applicable on all profits.
  • The most significant visible difference is in the user experience of investing in mutual funds versus smallcases.

The typical mutual fund buyer experience: Place an order, hopefully before the cut-off time to get that day’s NAV, and wait two days for units to reflect in your Demat or the folio on the AMC’s website. Repeat the process when exiting. To track performance, most investors rely on a monthly email with a password-protected pdf to track how NAV has progressed.

For digital natives, comparing the smallcase user experience to mutual funds can seem like the difference between streaming a Netflix show on-demand versus waiting for DVDs to arrive by snail mail. For those born after 2000, this was the original Netflix business model.

Looking for the best smallcase to invest in? Make sure you look at these five things first.

Image Source: the hustle.co

Combine a user-friendly interface with clever marketing, and the dominant narrative for many first-time investors is that smallcases are better than mutual funds.

And they are, in several ways. Just not necessarily in every way or for everyone.

Whether you are evaluating subscribing to a smallcase or believe you have found the best smallcase to invest in, here are five things new investors should consider.

1. The price you pay versus the amount you invest

Returns matter, net of costs. The most significant cost component in smallcases is the subscription fee. Usually, a fixed price is payable monthly, quarterly, semi-annually, or annually.

This fee is the absolute amount your portfolio needs to appreciate to recover your costs before you see any gains.

For example, if you pay ₹ 15,000 to access a smallcase and invest the minimum of ₹50,000, the portfolio needs to deliver a 30% return to recover your cost!

For reference, mutual funds have expense ratios of ~2% of AUM. To have a similar expense structure for a smallcase costing ₹ 15,000, you would have to invest close to ₹7,50,000 (7.5L).

If you are investing under ₹1L into a smallcase with a subscription fee over ₹10k, your chance of making a return exceeding the market return net of costs is almost non-existent.

As a rule of thumb, subscribe to a smallcase if your subscription cost will not exceed 3-5% of the aggregate amount you plan to invest.

2. Are your return expectations realistic?

They probably are not. A corollary to the point about costs and the most important reason to pause before subscribing to any smallcase.

Back in June 2021, most smallcases showed excellent performance. Fast forward to June 2022, and equity markets have struggled, and that shows in the performance of most smallcases.

You will certainly be disappointed if you extrapolate near-term returns into the distant future as your expectations from investing in any equity strategy. You will almost definitely see periods of negative returns because that is the nature of equity strategies. If you are likely to panic from 15% falls in your portfolio, most smallcases are not for you.

For instance, our Capitalmind momentum smallcase shows a fantastic annual return (CAGR) since going live in 2019. While we feel good about the performance and are optimistic about continuing to beat the market, we know that return numbers like 30%+ are not sustainable over 5-10 year periods. Not just momentum, no long-only equity strategy can sustain 2-3x market returns indefinitely. They will have flat and even down years. You will likely be disappointed if you subscribe to a smallcase with unrealistic return expectations.

Combine costs with return expectations, and you see how paying over ₹1k / month for a smallcase and investing the minimum ₹50-60k makes very little mathematical sense. Either your investment amount needs to be larger so the costs are a smaller component, or you need to find less expensive investment avenues.

3. Does your chosen smallcase have a (proven) track record?

We call this the “New T-shirt” problem. Ever notice how almost all new T-shirts look great? The colour, fit, everything just seems to work when you put one on for the first time. Then it goes into the wash a couple of times and it’s not the same anymore. The colour fades; the fabric starts to sag around the neck and shoulders. In a couple of washes, it’s only suited to wear around the house when doing chores. Not all T-shirts though. The quality stuff that’s still in your wardrobe after several washes, your go-to for when you want to feel confident about looking good.

Problem is, most smallcases look like new t-shirts. Great fits based on recent performance. You just can’t tell how they’ll look after a couple of washes (market corrections).

It’s human to be dazzled by short-term performance, especially when it is marketed well. But over short time periods, separating the impact of luck versus skill is almost impossible. Maybe it was one or two super-risky stocks that drove all of the return, or maybe it was exposure to stocks of one business group. Like in the case of an unlucky or lucky umpiring decision in cricket, these things even out over a longer time frame.

How long has the particular smallcase you’re considering been around? How did it do during the March 2020 crash?

Ok, how to find out how long a smallcase has been live for? You can see it on the smallcase page, right above the annualised return number, next to the volatility label. That number does not include the time for which backtested data was uploaded. Example: If it says “3Y CAGR” (means it has been live on smallcase for three years or a little over).

Once you apply this lens, you start noticing that so many smallcases haven’t been around for very long. Spectacular performance over a few months might or might not continue. When looking for your ideal smallcase, look for the smallcases that have a track record to speak of.

4. Is your chosen smallcase core or just one of many for the smallcase manager

You hear about this great smallcase, either through a compelling direct marketing email or through someone you know. You navigate to the smallcase page and see that it’s done incredibly well over the last few months, even the last year. Before signing up to invest, you go to the main page to know more about the smallcase manager.

Now let’s say the page lists a whole bunch of other smallcases, including the one that brought you here in the first place, all of which have catchy titles. Most likely, the one you’re considering seems to have done better than most of the others run by the same smallcase manager.

Are all these multiple smallcases materially different from each other? If yes, which are the highest conviction portfolios run by this manager? Is it feasible that a manager running so many smallcases is putting a concerted effort into doing the best for each smallcase or is this a spray-and-pray approach that ensures at least a couple of them will have done well over any short timeframes?

What is the implication if the smallcase you’re considering is one of a dozen run by the same smallcase manager?

Looking for the best smallcase to invest in? Make sure you look at these five things first.

Also called the Texas Sharpshooter fallacy. Image source: bayesianspectacles.org

If you put up 12 broken clocks on a wall in a room, each set to different times, at least one will be close to the current time, no matter when you enter the room. When you’re considering one of the so many smallcases by a manager, are you just picking the broken clock that’s showing the correct time right now?

What to look for: A limited number of smallcases with clearly differentiated investment philosophies.

5. More information is not always a good thing

We have met the enemy, and he is us – Walt Kelly

Looking for the best smallcase to invest in? Make sure you look at these five things first.

Source: newamericanjournal.net

A paper by noted behavioural economists Richard Thaler, known for his book Nudge, Kahnemann and Tversky, for their seminal bestseller Thinking Fast and Slow, examined and concluded that the more frequently you observe and note how your stocks are doing, the more likely you will take actions that detract from your investment performance. The paper is titled The Effect of Myopia and Loss Aversion on Risk-taking.

Having the ability to click once to buy/sell and a ready place to see how your stocks are doing in real-time is great. Of course, this is not a smallcase-specific issue, but our tendencies get in our way. A pleasing UI and UX means the temptation to arbitrarily exit one smallcase to buy another one that’s up for the day. Short-term dopamine hit unlocked, not necessarily longer-term investing returns.

Bottom line, smallcase makes investing easier than finding and picking individual stocks. Having access to professionally researched stock baskets built on diverse themes is a big positive. But the onus on understanding enough, so you’re not overpaying because of unrealistic expectations and being aware of costs involved, is on the investor. It is your money, after all.

Bonus Point: Things don’t always work on smallcase as expected – Be prepared

Smallcase is a convenient platform. But it has its issues sometimes.

Buy and Sell orders don’t always go as planned. You’ll need to know why and take appropriate action.

Two most common reasons why smallcase rebalances don’t go through:

Scenario 1: Stock hits upper or lower price limit: Stocks that hit the upper limit (when trying to buy) or lower limit (when trying to sell) will return errors. This means the stock you are buying has no sellers at that price, or the stock you are selling has no buyers at that price. To be clear, this has nothing to do with smallcase but with the availability of buyers or sellers for the stock on the exchange.

To complete the rebalance, you need to repair the smallcase when the stock comes out of circuit, i.e. when it is being traded again. With some stocks, this could happen later in the same day; with some it might take days before they give you the opportunity to exit.

Risk management on the part of the smallcase manager is critical to ensure the losses in such scenarios are not catastrophic. Example: A 50% loss in one position that is 4% of the portfolio that hits liquidity constraints means an overall 2% drop in portfolio value, which is well within acceptable limits. However, a smallcase that owns several stocks that frequently see liquidity dry up might see periods of spectacular performance but also might end up losing big. Another reason to not rely only on short-term performance when evaluating smallcase managers.

Scenario 2: Stock needs TOTP enabled: Some brokerages add additional measures to be able to buy or sell specific shares. Such stocks are typically part of exchange surveillance lists. Buying or selling stocks on this list usually involve having OTP-based login enabled on your brokerage account. If your smallcase order includes stocks on such lists, your smallcase order won’t go through until you make this change. For example, if you are a Zerodha user, here’s how to enable TOTP on your account.

There could be other scenarios rebalances don’t go as planned. Be prepared to figure out and take appropriate action. The onus of correct execution is on you, the smallcase subscriber.

Additional Bonus Point: Specifically for those investing “large” portfolio sizes through smallcase

Execution Slippage: Because smallcase places “market” orders and not “limit” orders, there is a real possibility of slippage negatively impacting the price you buy or sell, especially for large volume orders.

Think of a market order as saying, “get me hundred shares of this stock at whatever is the available price”, while a limit order is like saying, “get me hundred shares of this stock, but do not pay more than this price I specify”.

Execution slippage can be increasingly relevant for large portfolios, i.e. where you buy/sell individual stocks worth 2-3L, i.e. portfolio sizes greater than  20-25L are most susceptible to slippage impacts.

Most professional investors hardly ever use market orders for the possibility of getting unfavourable prices.

If you are considering investing substantial amounts in a momentum strategy, consider investing manually using limit orders or for amounts above INR 50L, consider investing in the Capitalmind PMS Momentum Strategy.


This is not a sponsored post, in case it wasn’t apparent. It is our point of view. Our March 2021 Momentum Portfolio fact sheet highlighted how momentum strategies could underperform for months. Some of the issues above will deter new subscribers to our momentum smallcase, and that’s ok. Investors making a more informed decision will likely see more value and therefore be longer-term subscribers, which is a win-win for investors and us.

  • Capitalmind Momentum smallcase – Quantitative momentum factor portfolio of stocks showing relatively stronger returns than the market, rebalanced monthly (reviewed weekly)

Capitalmind Momentum smallcase by Capitalmind

Click below for answers to frequently asked questions about the Capitalmind Momentum portfolio.

Looking for the best smallcase to invest in? Make sure you look at these five things first.

We did a candid video interview explaining the underlying philosophy of momentum investing, its strengths and also its weaknesses

What questions do you have for us? Connect with us on Twitter @capitalmind_in or over email on premium [at] capitalmind [dot] in

We publish regular and freely accessible updates on the Capitalmind Momentum portfolio, and You can find them all here: Momentum Factsheets

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