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Do More Smallcases Mean More Profit?

Smallcase is Easy

A fascinating new development for retail investors is smallcase. A smallcase invests in a selection of stocks or ETFs that have been carefully chosen by experts. Unlike a mutual fund, you actually own the stocks with smallcase. As a result, it only takes a few clicks to create your own stock portfolio.

Smallcase is frequently promoted as a simple method for investment diversification.

Diversification is a risk management tactic that incorporates a wide range of investments into a portfolio. To reduce exposure to any one asset or risk, a diversified portfolio combines a variety of different asset classes and investment vehicles.

Buying Multiple Smallcases

A smallcase typically has a theme at its core. This means that if a market event affects a specific stock, it is very likely to jeopardise the entire investment thesis. If you have a few smallcases, they can help you deal with market volatility.

Investors may also want to purchase multiple smallcases from different providers to reduce risk. If diversification is beneficial, one might be tempted to spread their capital across a variety of smallcases.

Is It a Good Idea?

As easy as buying multiple smallcases sounds it comes with a few cons

  • Owning more smallcases will cause more problems because you will have to pay a minimum amount in fees for each smallcase. As compounding sets in, this will significantly reduce your corpus over time.

  • There is already some overlap in equities owned if you own multiple smallcases. With a limited number of equities in the Indian markets, it is natural that some well-performing stocks will be repeated as you acquire more smallcases. With this comes concentration risk.

  • One smallcase typically contains 10-15 stocks; purchasing ten of these will result in 100-150 stocks in your demat account. This will be extremely difficult to track.

  • No matter how much capital you put into 10-15 smallcases, only a percentage or a portion will be allocated to a specific stock. That means that even a multi-bagger will not produce significant returns for your overall portfolio.

  • True diversification entails investing in more than one asset class. Smallcase may limit you to stocks, bonds, or even ETFs. For true diversification, you must invest in various uncorrelated asset classes such as gold, real estate, cryptocurrency, commodities, and international equities.

In Sum

Purchasing multiple smallcases will not increase your profits, but if done methodically, you can utilise it to reduce your risk. Choose 2-3 smallcases that correspond to your investment objectives. Stick with the themes you've chosen and give them time to shine. Don't give in to market volatility and switch between smallcases.

Check out our selection of Rupeeting Equity portfolios on smallcase, which aim to outperform the market while charging the smallest fees. Our experts have over 50 years of combined investment expertise and have overseen the management of over Rs. 50,000 crore.

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