Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial

Five things to consider before investing in a smallcase in 2022


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.

Capitalmind Momentum smallcase is one of the longest-running and best-performing momentum portfolios on smallcase. It has also done reasonably well since its launch nearly three years ago and has been one of the most popular and best-performing smallcases in 2020 and 2021.

Since there is a tremendous amount of interest in Momentum strategies and in smallcases, we think there are five key things all new investors should consider before subscribing to any smallcase.

What is 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 own 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. User logs in and clicks the ‘Rebalance’ button, and confirms the transaction. The smallcase platform places the applicable buy and sell orders through your regular trading account and confirms when the transactions are executed.

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 case of smallcase, you directly own the stocks
  • Equity Mutual funds only need to disclose their holdings once a month, so you don’t necessarily 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 exactly 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 biggest 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, 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.

Five things to consider before investing in a smallcase in 2022

Image Source: the

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

And they are, in a number of 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 definitely consider.

1.  The price you pay versus the amount you invest

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

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

For example, if you pay ₹ 15,000 to access a smallcase, and invest the minimum ₹50,000, the portfolio needs to deliver 30% return to just 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 be investing 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 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. This is a corollary to the point about costs and the most important reason to pause before subscribing to a smallcase.

As of June 2021, the last 12-18 months show great performance for many smallcases.

You will almost 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 10% falls in your portfolio, most smallcases are not for you.

For instance, our Capitalmind momentum smallcase shows a fantastic annual return (CAGR) of over 50% 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 50% are not sustainable over 5-10 year periods. In fact, no long-only equity strategy can sustain 2-3x market returns indefinitely. They will have flat and even down years. If you subscribe to a smallcase with unrealistic return expectations, you will likely be disappointed.

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. Transaction Costs, Slippage and Taxes add up

No escaping Death and Taxes, someone wise once said. They should add transaction costs to that list.

Taxes: When a mutual fund buys and sells shares, the gains realised are not taxable for the investor. The investor is only liable to pay tax when she exits the investment. Not so, when you rebalance a smallcase. The gains count as short-term taxable gains and have the 15% STCG tax rate applicable. To only match a pure NIFTY buy-and-hold strategy, a smallcase that rebalances frequently would need to deliver a good 500 basis points (5% return) higher than the NIFTY.

Transaction Costs: smallcase rebalances generate transactions to bring your weights back to the originally defined weights. This means, in addition to the specific stocks being bought and sold, each rebalance also has triggers small buy and sells for the other stocks. Brokerage and STT (Securities Transaction Tax) is applicable. In addition, each sale has an additional cost, called the Depository Participant Charge. And get this, be it sale of one share of a stock or a thousand shares, the same Depository Participant Charge of ₹13.5 + GST is applicable. When we first noticed this, we wrote in detail about how to minimise these: How smallcase users can save on rebalancing costs

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

Think of a market order as saying “get me 10 shares of this stock at whatever is the available price”, while a limit order is like saying “get me 10 shares of this stock, but do not pay more than this price I specify”.

This is particularly true 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.

4. Things don’t always work as expected – Be prepared

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:

Stock hits upper or lower price limit: Stocks that hit 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. Just 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. is being traded again. This could be the same day or a subsequent trading day.

Stock needs TOTP enabled: Some brokerages add additional measures to be able to buy or sell certain shares. Such stocks are typically part of exchange surveillance lists. Buying or selling stocks on this list typically involves 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.

5. More information is not always a good thing

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

Five things to consider before investing in a smallcase in 2022


A paper by noted behavioral economists Richard Thaler, known for his book Nudge, Kahnemann and Tversky, for their seminal bestseller Thinking Fast and Slow, examined and concluded, 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. This is not a smallcase-specific issue of course, but our own tendencies that get in our way. A pleasing UI and UX means there is 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.

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

Five things to consider before investing in a smallcase in 2022

Connect with us on twitter @capitalmind_in or over email on premium [at] capitalmind [dot] in


Like our content? Join Capitalmind Premium.

  • Equity, fixed income, macro and personal finance research
  • Model equity and fixed-income portfolios
  • Exclusive apps, tutorials, and member community
Subscribe Now Or start with a free-trial