8 Things To Check Before Investing In A Smallcase Portfolio | Smallcase How To Guides

by Navyaa

Published On May 27, 2024

In this article

Investing has gone through significant evolution over the past few years. There has been a change in the financial sector as new and more innovative tools and options have emerged. One such innovation in the Indian financial market is the concept of Smallcases. These are baskets of stocks or exchange-traded funds (ETFs) that are based on a specific theme, strategy, or objective. However, before investing in smallcases, it’s crucial to conduct thorough research and consider several factors affecting the performance and growth of these stocks.

Investing In Smallcases

Smallcases are pre-built portfolios of stocks and exchange traded funds created by financial experts. These experts are registered under Securities and Exchange Board of India (SEBI) and are also called smallcase investment managers. Each Smallcase is designed around a specific theme or strategy, such as sectoral markets, market capitalizations, or financial metrics like high dividend yields or growth potential. Smallcases offer several benefits over traditional investment options such as mutual funds. They are more transparent and easy to invest in due to the simple procedure. Furthermore, they also help reduce investor risk by helping spread the risk and enhance the stability of the portfolio. However, they also come with certain risks that investors should take note of before investing in smallcases such as concentration risk and low growth.

Check out our Smallcase Guides to Understand What is Smallcase and How Does it Work?

Therefore, some things that must be kept in mind starting your investment journey are:

1. Identify Your Investment Objectives

In order to make the correct investment decision, the first step is to clearly define the financial goals. By understanding what you want to achieve you can choose the smallcase that aligns with your own unique goals and aspirations. For eg. If the objective is to have a constant income source, you may want to select the smallcase which focuses on high yielding large cap companies, while on the other hand if you want long term growth you may want to choose smallcases that focus on growth stocks and emerging sectors.

Read this article to learn How to Set Achievable Financial Goals for 2024

2. Align with Your Investment Horizon

Your investment horizon as in the period over which you plan to hold your investments should align with the strategy of the Smallcase. If you have short-term financial goals, you should look for Smallcases designed for short-term gains, such as those focusing on current market trends and growing companies. Conversely, for long-term goals, you may consider smallcases that are built around themes or sectors, which take advantage of long term sectoral growth and innovative opportunities like technological advancements, demographic changes, or sustainable investing. Aligning the investment strategy with your investment horizon ensures that the smallcase you choose matches your financial objectives and risk tolerance, helping you achieve your goals.

Set your financial goals to align to your investment horizon with Wright’s free tool .

3. Analyze the Theme and Strategy

Each Smallcase is built around a specific theme or investment strategy. It’s essential to understand and analyze these themes in order to ensure that it aligns with your investment philosophy and strategy. Some popular themes include sectoral themes focusing on specific sectors like technology, pharmaceuticals, or consumer goods; economic trends based on macroeconomic factors such as rising interest rates, urbanization, or digitalization; and financial metrics like high growth, value investing, or dividend yields. Thoroughly research the theme and evaluate its potential for future growth.

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4. Review the Historical Performance

While past performance may not accurately predict the returns on your investment it provides valuable insights into how the Smallcase has performed under different market conditions. By comparing the performance of different smallcase or benchmarking the smallcases against indices like nifty 50, you can predict which portfolio will yield the highest returns at the lowest risk. Further, considering how the Smallcase has weathered different market cycles, such as bull and bear markets, also provides a deeper understanding of its stability and adaptability. By thoroughly evaluating these aspects, you can ensure that the Smallcase aligns with your investment goals and risk tolerance, leading to more informed and confident investment decisions.

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5. Examine the Performance of the Smallcase Manager

Smallcases are curated by SEBI registered financial experts or institutions. These managers are responsible for managing and adjusting the stocks within the portfolio based on market trends and performance. Therefore, it is important to assess the credibility and track record of the manager. A manager with the correct expertise and industry knowledge will be aware of the market performance and how different factors affect different stocks.

6. Determining Your Investment Amount and Allocation

When considering how much to invest and how much amount to allocate to Smallcases, it's crucial to balance the potential for high returns with the associated risks. Smallcases, while offering a diversified approach to investing, can still be risk-intensive. While they may help you build wealth, they also pose higher risk than mutual funds and other traditional instruments, especially in volatile markets. A key principle to remember is not to invest more money than you can afford to lose. Your investment in Smallcases should align with your risk appetite, ensuring that you are comfortable with the level of risk involved and that you are not overcommitting your financial resources.

7. Tax implications

Investing in Smallcases has tax implications that can affect your overall returns. Being aware of these factors helps in planning your investments better and optimizing CAGR. If you sell your Smallcase stock investments within 12 months of buying, the gains are subject to short-term capital gains tax at a rate of 15%, with this tax applying only to profits, not losses. Conversely, if you hold your Smallcase stock investments for more than 12 months, the gains are called long-term capital gains tax, and taxed at a rate of 10%. However only gains in addition to Rs. 1,00,000 are taxed.

8. Consider the Fees and Charges

Investing in Smallcases may involve certain additional fees and costs that can impact your net returns. It is therefore essential to evaluate these fees to ensure they do not significantly affect your investment gains. Firstly, consider the brokerage fees, which are the fees charged by the brokerage platform for executing transactions. Next, look at the management fees, charged by the smallcase manager for managing and preparing the portfolio. Additionally, there may be costs associated to selling stocks or rebalancing your smallcase portfolio. Assessing these fees is crucial to ensure that the costs are justified and that the investment remains profitable.

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

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Investing in Smallcases has the potential to offer high returns on the capital invested by the investors due to its numerous advantages. However, like any investment, it requires thorough research and consideration of various factors. By thoroughly evaluating these factors and their effect on the stocks, investors can make more informed and confident investment decisions. Successful investing is not just about choosing the investment option but also about maintaining an active approach, staying informed, and being adaptable to changing market conditions. With proper due diligence and informed decisions, smallcases can help you achieve your financial goals and build long-term wealth.

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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