What are the differences between Mutual Funds and Smallcase investments?

As an investor if you want to invest in equity, you have 2 options- you either invest directly via stock market or through equity based mutual funds. A small case is a new and exciting product for retail investors that offers portfolio diversification as an in-built feature.

What is a smallcase?

The new term ‘smallcase’ is something that is catching on with digitally savvy investors.

It is essentially a basket of stocks or ETFs, curated around a specific theme, or a specific investing style. For example Rising Rural Demand - Companies that stand to benefit from increasing rural consumption, IT Tracker- Companies to efficiently track and invest in the IT sector, etc

Under this platform, an investor can either create their own model investment portfolio, also termed as smallcase, or choose from the several existing ones which are created and managed by SEBI (Securities and Exchange Board of India) registered entities. All one needs to begin investing is a trading account and a demat account.

So again, back to the basic question, how is this any different from a mutual fund?

Smallcase portfolios often get compared with mutual funds. While the two are similar in that they both minimize risk through diversification, there are some of the prominent differences too.

Check our course- NM 104: Basics of Mutual Funds - to learn more about Mutual Funds in detail.

Mutual Fund	Small Case
When you invest in a Mutual Fund, you buy units and not the individual stocks	You buy the stock rather than units
Managed by mutual fund managers of the respective fund house	Managed by different entities including research firms, financial planners, etc
Predominantly have categorized based on fund size	Smallcase portfolio is built on the theme or idea
Mutual funds have an expense ratio	The cost would vary from broker to broker. They can be a little on a higher side as compared to mutual funds.
Only the fund manager has the authority to update your fund and add or remove stocks	Flexible as it allows you to update your smallcase portfolio and add or remove stocks
Some mutual funds preclude investors from exiting their investments for a certain period of time	No lock-in periods
Some mutual funds preclude investors from exiting their investments for a certain period of time	Needs a higher capital for investing. Since you are directly investing in shares, you will have to buy each unit of them, and to create diversification takes much of your capital
Mutual funds are managed by experts they have a lower risk	Smallcase comes with a higher risk
There are some mutual funds that are termed ELSS (Equity Linked Saving Schemes) which can give you some tax benefits.	There is no tax benefit

Wealth Cafe Advice:

Mutual funds can be preferred for investors who are not from a financial background and want to give all the control to a third party to manage the money on their behalf.

Smallcase on the other hand can be useful for someone who’s with some financial intelligence and understands the technical jargon of the market

However, You need to have a long-term view towards investing if you want to put your money in smallcases.

Understanding 'Mutual Fund Units & NAV

Hello fellow investors

More than 6 months into lockdown, 1 market crash and 1 great recovery, the only constant thing is our learning and our Thursday emails. We started writing our emails soon after lockdown and now we enjoy it so much that we cannot wait for the next Thursday to come and share some insights from the finance world with you.

In today's email, I am going back to the basics of Mutual Funds and explain what exactly are Mutual Fund Units and NAV and how they help or not help you make investment decisions.

What is a Mutual Fund Unit?

Just as share represent the ownership of Equity, units represent the ownership of Mutual funds. When you invest 5000 INR in a mutual fund and the NAV of the fund is 50 INR - you would get 100 units.

It is like buying petrol when you go to the petrol pump, you ask them to fille petrol in your car for 1000 INR. If the price per litre is INR 100, you would get 10 litres of petrol in your car.

Let's understand a few facts about Units of Mutual Funds

1. You don't need to buy 1 entire unit of Mutual Fund
You can buy a mutual fund in fractions or parts, it is the amount of money you invest that determines how many units you get. Like when you fill petrol in your car, you tell them fille petrol of INR 1000, if per litre petrol price is 72, you get 13.88 litres of petrol. The same thing happens with Mutual Funds.

2. You do not sell all your units to withdraw from Mutual Funds.
As you can partially invest in mutual funds, you can also partially withdraw from mutual funds. You can do that anytime you want (unless they are close-ended schemes)

3. Units are not the same as the share price
Equity Mutual Funds invests in Equity stocks/shares but it does not mean that units are the same thing. The share price is of an individual company and the demand and supply of that particular stock are one of the factors of their share price movements. Such does not happen to mutual fund units.

An average of all the underlying stocks of the mutual funds helps determine the value of each unit which is called as Net Asset Value - NAV.

4. NAV is the price of each unit
The price of each unit of a mutual fund is the NAV. If you want to buy 1 unit of a mutual fund, the price you have to pay is the NAV of that mutual fund’s unit on that day.NAV changes every day. So when the NAV goes up, you gain.

A high NAV does not mean that a particular Mutual Fund is better than the one with a low NAV. NAV price does not determine the value of the Mutual Fund.

NAV= (Total market value of assets invested by the fund-Expenses)/No of Units

5. Mutual fund unit price (NAV) goes up and down

As NAV is determined based on the total market value of the assets invested in by mutual fund which includes shares, bonds, cash, any interest or dividend earned by them and would also capture the movement in the price of shares & bonds, the NAV would also move.

NAV of a fund changes every day where there is a change in the underlying asset, this change helps you know if you are in profit or loss.

Mutual Funds are considered one of the most common forms of investing today, in fact it has generated a lot of wealth for investors who have understood the risk of investing in them and managed it appropriately. We will soon be launching a course on Mutual Funds and more, so stay tuned and keep reading our emailers for a detailed update on the same super soon.

Disclaimer: - The articles are for information purposes only. Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. You must consult a financial advisor who understands your specific circumstances and situation before taking an investment decision.