- Wealth PMS (50L+)
There are hundreds of smallcases to choose from. Each month brings a new list of smallcases showing great short-term returns. You already know that’s not the best way to pick the smallcase to invest in. Not every investing strategy is for everyone, so looking beyond recent returns is essential before investing in one. Here’s the definitive common-sense guide.
With a five-year live track record, Capitalmind Momentum is one of the longest-running smallcases with a track record to match. Since its launch, it has consistently been among the most popular and best-performing smallcases.
We believe Capitalmind Momentum, Capitalmind Low Vol and Capitalmind Focused are the best smallcases you can invest in 2024 for long-term wealth-building. But that doesn’t mean they are right for you. Not until you’ve read the rest of this article and understood how smallcases work, how they differ from mutual funds, and what are the pros and cons of subscribing to a smallcase.
Here are five key things all new investors should consider before subscribing to any smallcase.
smallcases are baskets of stocks, either curated by investors themselves or by professional managers. They differ from mutual funds in five key ways:
Whether you are evaluating subscribing to a smallcase or believe you have found the best smallcase to invest in, here are five things new (and even existing) investors should consider.
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.
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 struggled, and that shows in the performance of most smallcases.
You will 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.
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.
A recent independent whitepaper by Rajan Raju titled “smallcases Investment Performance: A returns-based Factor Analysis” examines 36 smallcases between Dec 2019 and Dec 2022 for evidence of their factor exposures and alpha over a three-year timeframe. The comparison included some of the most popular smallcases including the Capitalmind Momentum smallcase.
The paper highlights interesting findings, for example:
“Many smallcases do not show proof of outperforming the benchmark for their universe of stocks despite the more concentrated portfolios and frequent rebalancing.”
“4 smallcases (out of 36), including Capitalmind Momentum…evidence statistically significant intercept coefficients at 5%. The null hypothesis of a zero value for the intercept is not rejected for the remaining smallcases in our sample.”
Put simply, only 4 of the 36 smallcases the author analysed showed evidence of outperformance versus benchmarks.
Another surprising finding in the paper:
“Among the smallcases of Momentum, 2 smallcases, Capitalmind Momentum and Flameback show statistically significant evidence of exposure to Momentum Factor….The other smallcases under this category do not show statistical evidence of exposure to the Momentum Factor – possibly due to the high idiosyncractic risks arising from the concentrated portfolios.”
According to the paper, many smallcases call themselves momentum smallcases, but only two were statistically proven to be harnessing the momentum factor.
You hear that this smallcase has had great returns. Either through a direct marketing email or through a whatsapp marketing message that said how it had done 15% in one month! 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?
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?
We have met the enemy, and he is us – Walt Kelly
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 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.
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 smallcase 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.
This is not a sponsored post, in case it wasn’t apparent. It is our point of view from hard-won experience.
If you’re still reading, here’s a little bit about our smallcases (and also how you can get an even better deal when you subscribe). We have three smallcases, each with distinct investment philosophies.
Our March 2021 Momentum Portfolio fact sheet highlighted how momentum strategies could underperform for months. Some of the issues highlighted 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.
If your objective is long-term wealth-building, subscribe to Capitalmind Smallcase. Mention the text: “///sulk.breakfast.brother” in your twitter DM or email and our team will try (no guarantees) their best to get you a slightly better deal when you subscribe.
For any queries, reach out to us: on Twitter @capitalmind_in or over email: smallcase [at] capitalmind [dot] in.
We did a candid video interview explaining the underlying philosophy of momentum investing, its strengths and also its weaknesses
Head over to All you need to know about Capitalmind Momentum for more information. We publish regular and freely accessible updates on the Capitalmind Momentum portfolio, and You can find them all here: Momentum Factsheets
What questions do you have for us? Connect with us on Twitter @capitalmind_in or over email on premium [at] capitalmind [dot] in