10 Ways How smallcases are Better than Equity Mutual Funds
We know that #MutualFundSahiHai, but now let’s see why #smallcaseBehtarHai.
Lower cost of investment
Equity funds have an annual expense ratio of 1% to 2.5%. The direct plans are much cheaper than the regular plans, so let’s assume an average expense ratio of 1.5%.
The expense ratio is the annual investment fee deducted from your investments in an equity fund. This is the cost you pay for investing in a fund. Let’s say you invest Rs 20,000 every month in an equity fund. In a year, you will invest Rs 2,40,000 and 1.5% of that is Rs 3,600. This is what you’re paying the equity fund as fund management fees and fees for other expenses. If you have invested in a regular plan, then the distributor’s commission will also be a part of the expense ratio. This expense ratio is automatically deducted from your investments.
In comparison, you only pay fees/brokerage when you place orders for a smallcase. This brokerage would depend on the broker with whom you have a demat account. You don’t pay smallcase any investment fee. Hence, investing in a smallcase is just a fraction of the expense ratio of an equity fund.
Flexible and transparent portfolio
An equity fund and a smallcase are both a portfolio of stocks that have been built by experts and research analysts. But the experts are not the only ones who know everything. You might have specific knowledge about a particular stock, because of which you might want to emit or add it to your portfolio.
An equity fund won’t allow you to do that. A smallcase will. When you invest in an equity fund, you have to compulsorily take exposure to all the stocks in the fund’s portfolio. But, a smallcase’s portfolio can be customised by you. Don’t like a stock? Remove it. Want to invest in one more stock? Add it. Want to increase exposure to a stock? Do it.
Not only is a smallcase’s portfolio this flexible, it is also more transparent. An equity fund reveals its portfolio constituents only once a month, while a smallcase portfolio can be viewed anytime you want.
Ownership of shares
When you invest in a mutual fund, you get fund units. On the other hand, when you invest in a smallcase, you get shares in your demat account. This is a big plus because it allows you to earn dividend income. When a company declares dividend, it comes directly into the shareholder’s bank account and you don’t even have to pay tax on it.
Dividends from equity funds are not the same as dividends from stocks. Stock dividends are an additional income that you earn over and above the capital gains you make. Equity fund dividends are a part of your capital gains that are given out to you and are subject to 10% dividend distribution tax. For example, if the current value of your fund investment is Rs 1 lakh and the fund gives you a dividend of Rs 2,000, then your investment value will go down to Rs 98,000.
Hence, equity fund dividends are not actual returns or additional profits. They are a part of your own investment only. But if your smallcase investment is worth Rs 1 lakh and a company within that smallcase declares dividend, then you will receive the dividend without it lowering your entire investment value. This truly becomes an additional income that you can earn thanks to direct ownership of shares.
Aligning ideas to investments
Equity mutual funds allow you to invest in stocks by market capitalisation, investment approaches or sectors. You can invest in a large-cap fund or a value investing fund or an infrastructure fund. But equity investments should not be limited by market cap or sectors.
A smallcase allows you to invest in themes that are based on strong ideas. GST, affordable housing, electric mobility, etc are all ideas and themes that make a strong investment case. For example, the government’s focus on providing affordable housing to all will benefit companies that are fulfilling and enabling affordable housing projects. There’s a smallcase for that, but no equity fund.
A smallcase will allow you to invest in such themes or ideas, but there are no equity fund that will provide such exposure.
Higher returns
smallcases are built in a manner to optimise returns. A smallcase consists of no more than 20 stocks, which means that every stock has a meaningful impact on the portfolio’s returns.
The following table shows how the average smallcase returns have been way higher than the average equity fund returns over various time periods.
As you can see, the numbers speak for themselves. Returns are primarily what we invest in equities for, and the higher the better.
Hence, #smallcasesBehtarHai.