How Many Smallcases Should You Have in Your Portfolio? | Smallcase How To Guides

by Navyaa

Published On May 23, 2024

In this article

Smallcases have recently gained popularity as an innovative investment option, offering diversified portfolios based around specific themes or strategies. However, as investors begin their investment journey they are faced with an important question : how many smallcases to invest in and how many may be too many? Therefore, finding the right balance is crucial for optimizing your smallcase returns and managing risk.

Features of Smallcases

Before investing in smallcases, it is important to understand the characteristics of smallcase. This can help investors in better determining the amount of smallcases they should invest in and minimize the loss of capital. Some features are:

Thematic Investing

One of the primary features of Smallcases is thematic and sectoral investing. Each smallcase is built around a specific theme or idea, such as technology disruption, healthcare innovation, or sustainable energy. This thematic approach allows investors to align their portfolios with trends, industries, or causes they believe in or anticipate significant growth opportunities. Further, investors can also choose to invest in different smallcases to ensure that they are able to capitalize on the growth opportunities across different sectors.

Customization and Personalization

Another beneficial feature of smallcases is the ability to customize and personalize investment portfolios according to individual preferences and risk profiles. Investors can choose from a wide range of smallcases spanning various themes, sectors, and risk levels. Furthermore, investors have the flexibility to modify their smallcase holdings over time to maximize their returns. Unlike other traditional investment options, smallcase can be partially or fully exited at any point of time. This is particularly helpful for investors if they are in urgent need of funds or wish to reinvest the funds somewhere else.

Transparent Composition

Transparency is another feature of smallcases. Investors can easily access information about the composition of each smallcase, including the various stocks, their respective weights, and the rationale behind the theme selection. Investors can access this information at any point of time and check on the composition of their portfolio. This transparency helps instill more confidence in investors and helps them in making informed decisions based on their understanding of the smallcase stocks and investment strategy.

Cost-Efficient Investing

Smallcases offer cost-efficient investing compared to traditional mutual funds or exchange-traded funds (ETFs). Since smallcases are directly invested in individual stocks, investors have to pay comparatively low additional management fees compared to other investment options such as mutual funds or ETFs. Further, smallcase have a low minimum capital requirement making it a good option for budget conscious and conservative investors. This cost efficiency can potentially enhance long-term returns by minimizing the impact of fees on investment performance.

Read this article to Understand Smallcase Returns, Lock-In Periods, and Minimum Investments

No Lock-In Period

Unlike certain investment products that impose lock-in periods or time restrictions, smallcases offer a higher liquidity and flexibility to investors. Investors can buy or sell smallcases at any time during market hours, providing them with the freedom to adjust their portfolios based on market trends or personal requirements.

Read this article to know if Should You Invest In Smallcases? Are Smallcases a Good Investment?

Factors Influencing the Number of Smallcases

Investment Goals and Risk Tolerance

One of the primary factors influencing the number of Smallcases in an investor's portfolio is their investment goals and risk tolerance . Investors with a higher risk tolerance can opt for a larger number of Smallcases to diversify their investments across various themes and sectors. By spreading their capital across multiple Smallcases, they can reduce risk associated with individual stocks or sectors. On the other hand, investors with conservative investment goals or low commitment may prefer a smaller number of Smallcases. They can instead focus on more stable and established companies, to generate income and accumulate wealth over time.

Time and Resources

Another crucial consideration is the amount of time and resources investors are willing to dedicate to managing their portfolios. Managing multiple Smallcases requires time and effort to track performance, rebalance smallcase portfolios , and stay informed about market trends. Investors with limited time or resources will find it challenging to effectively manage a large number of Smallcases. As a result, they should form a smaller number of carefully selected Smallcases. By reducing the number of Smallcases, investors can simplify portfolio management and focus on making better and more informed investment decisions.

Why You Should Invest in Multiple Smallcases

1. Diversify Your Portfolio & Manage Volatility

Investing in multiple Smallcases helps manage diversification & portfolio volatility. Smallcases are bundled thematic investments, which means if one theme is affected by market movements, other Smallcases can stabilize the overall portfolio. This diversification helps navigate short-term market fluctuations more smoothly.

2. Goal Specific Smallcases

Diversifying across multiple Smallcases can help meet diverse financial goals. By investing in Smallcases that focus on capital appreciation, inflation-beating returns, stable income, and wealth protection, investors can allocate their funds to achieve various objectives. This strategic division allows for better management of investments aligned with specific goals.

3. Ease of Implementation

Smallcases offer ease of implementation. Investors can buy and sell Smallcases directly, similar to trading stocks. The shares are credited directly to the investor's demat account. Additionally, Smallcases are monitored and rebalanced regularly by SEBI-registered professionals, ensuring secure and well-managed portfolios.

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Why You Should Not Invest in Multiple Smallcases

1. Overlapping Stocks & Concentration In Your Portfolio

Excessive diversification through multiple Smallcases can lead to portfolio overlap. Well-performing stocks might be repeated across different themes, increasing concentration risk. This can result in an uneven performance, where returns get averaged out due to the high cumulative exposure to particular stocks.

2. Expense Fee Ratio

Subscribing to quality Smallcases involves fees, typically around 1-2%. While this fee provides professional fund management at a lower cost, overspending on multiple Smallcases can make it harder to achieve a net profit. Investors need to balance the benefits against the costs by managing their expense fee ratio to ensure profitability.

Read this article to Understanding Smallcase Fees, Charges, and Taxes

3. Difficult to Manage Too Many Smallcases

Managing multiple Smallcases can be challenging. For instance, investing in 10 or more Smallcases, each comprising at least 15-25 companies, results in a portfolio with over 150-250 stocks. Monitoring and managing such a large portfolio is difficult, making it hard to track performance and manage risk. It's crucial for investors to understand their portfolio's details, which is easier with a few selected Smallcases.

4. Changing Market Conditions

Market conditions and investment strategy also play a significant role in determining the optimal number of Smallcases in a portfolio. During periods of market volatility or uncertainty, investors may choose to diversify across a larger number of Smallcases to spread the risk and earn better through exposure to different sectors and industries. Conversely, a focused investment strategy can also be opted by selecting a few Smallcases that align closely with specific market trends or personal aspirations.

How to Find the Right Balance For Smallcases

In order to find the correct composition, investors must be mindful regarding the following:

1. Assessing Portfolio Composition

To effectively manage your portfolio, it is essential to evaluate the existing stocks in your portfolio and identify any gaps or areas where additional diversification is needed. Assessing the sectors, industries, in your Smallcases can help you to ensure that your portfolio is well-balanced and not overly concentrated in any particular area.

2. Aligning with Investment Objectives

Define clear investment objectives that align with your financial goals, risk tolerance, and time horizon. Once you have identified your objectives, select Smallcases that align with these goals. For example, if your objective is capital generation, consider investing in Smallcases that focus on growth-oriented sectors or emerging market opportunities. Balance the desire for growth with the need for stability by diversifying across Smallcases with varying risk profiles.

3. Monitoring Performance and Regular Rebalancing

Regularly monitor the performance of each Smallcase in your portfolio and make adjustments as necessary to maintain optimal diversification. You can sell any excess stocks or buy additional smallcases depending on your budget and availability of funds. Assess whether each Smallcase is meeting its investment objectives and replace underperforming Smallcases with better opportunities By rebalancing your portfolio regularly, you can ensure that your investments remain aligned to the investment manager's recommended model smallcase along with align to your investment objectives and risk tolerance over time.

Do More Smallcases Mean More Profit?

Purchasing multiple Smallcases does not necessarily lead to increased profits. However, when done methodically, it can help reduce risk. So, there are 2 important questions

  • Do More Smallcases Mean More Profit?

  • How Many Smallcases Are Too Many?

1. Strategic Selection

Choose 3-4 Smallcases that align with your investment objectives. This targeted approach ensures that your investments are focused on themes that are relevant to your financial goals. You can choose to have more smallcases as long as any new additions do not increase your concentration risk and maintain your portfolio’s expense ratio.

2. Consistency is Key

Stick with the themes you've chosen and give them time to perform. Market volatility can tempt investors to switch between Smallcases frequently, but maintaining consistency is crucial for long-term success. Equity markets are long term focused and you should give your smallcases a 3-5 year horizon with regular portfolio checks and reviews to ensure it is performing up to the mark.

3. Risk Management

Diversifying into a few well-chosen Smallcases can help manage risk without overwhelming your portfolio. This balance allows you to benefit from diversification while still being able to monitor and manage your investments effectively.

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Determining the ideal number of Smallcases for your portfolio requires careful consideration of various factors, including investment goals, risk tolerance, time constraints, and market conditions. While diversification is key to managing risk, investors should avoid overdiversification and strike a balance that aligns with their objectives and resources. By adopting a disciplined approach to portfolio building and management, investors can maximize returns and better navigate the dynamic landscape of Smallcase investments with confidence.

Read these comprehensive Smallcase How To Guides to understand all you need to know about Smallcases:

  1. Understanding What is Smallcase and How Does it Work?

  2. Features & Benefits of Investing in Smallcases

  3. 8 Things To Check Before Investing In A Smallcase Portfolio

  4. Should You Invest In Smallcases? Are Smallcases a Good Investment?

  5. Understanding the Importance of Rebalancing Your Smallcase Investments

  6. How to Use Existing Demat Accounts to Invest in Smallcases

  7. How To Choose Between Different Types Of Smallcases

  8. Understanding Smallcase Returns, Lock-In Periods, and Minimum Investments

  9. Understanding Smallcase Fees, Charges, and Taxes

  10. How to start SIPs with Smallcase?

  11. How Many Smallcases Should You Have in Your Portfolio?

  12. Where can I view my saved smallcases?

  13. How to Evaluate Smallcase Performance Using CAGR & XIRR

  14. Why Use XIRR Instead of CAGR To Evaluate Your Smallcases Performance

  15. How to Reinvest in a Smallcase You Had Once Exited From

  16. How to Partially Exit or Sell Individual Stocks in Smallcases

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