Many mutual fund investors are talking about curated stock portfolios like “Smallcase” these days. If you missed the buzz, these platforms provide baskets of stocks based on various themes, strategies and allocation processes. Sounds much like thematic mutual funds? If you are also wondering if these platforms are an alternative for mutual fund schemes, keep on reading.

First of all, how do these curated portfolios work? Basically, platforms like “Smallcase” use the RIA model, where registered investment advisors create baskets of stocks. Just like some mutual funds schemes, these baskets are made based on various strategies like value, growth, themes, sectors etc. However, these platforms provide a wider range of options. For example, you will have IT sector funds in the mutual fund industry. But you can invest in Electric Mobility, Green Energy, Digital Inclusion etc via small cases. Not just themes, but strategies like low volatility, defensive investments, and so on are also available on the platform.

“Earlier, you would do your research and find stocks that match your investment strategy, then you would go to a broker or a broking site and place the order for individual stocks. It was a long and inconvenient process. Your portfolio would have all these stocks and that would become difficult to manage. With “Smallcase”, you have RIAs and investment managers doing the research and categorizing the stocks based on various factors. We have tie-ups with the broking sites as well. So, an investor has to just pick the portfolio and buy it. The transaction will be in the investor’s name and the portfolio, instead of showing you 70 stocks, will show you 2 buckets of stocks. This makes investing easier for those who want to buy stocks but can’t or don’t want to do the research,” says Vasanth Kamath, CEO, “Smallcase”.

Now, why are investors curious about these platforms? The answer is simple: the potential to earn higher returns and ease of selecting stocks. The concentrated portfolios and smaller size of these portfolios is giving them an edge over many big equity schemes. Sunil Singhania, Founder of Abakkus Asset Management, runs many curated baskets of stocks on these platforms. He believes that these curated portfolios can offer bigger returns but there is a catch.
“Of course, the curated portfolios have the ability to give you higher returns, but it also comes with risk. Investors who do not understand stock investments and the risks associated with it, should not try their luck here. Second thing is, now mutual funds have a lot of restrictions in terms of stock picking and allocations. These curated portfolios don’t have restrictions. They can take the extra risks to gain extra returns. It works well if you have the ability to take the extra risk,” says Sunil Singhania.

However, with all the good things, the platform can not be an alternative for your good old mutual funds. Mutual fund advisors, RIAs and investment managers, all suggest that mutual funds make more sense for the first time, new and retail investors. First of all, mutual funds are extremely easy to use and manage. Stock investing requires investors to trade on the exchanges via a demat account and afterwards manage all the stocks in their portfolio. This can be a daunting task for someone who doesn’t understand stock investments or doesn’t have the time to manage the portfolio.

“Investors who have no idea or intent to invest directly in stocks should stick to mutual funds. I always say that you should start your investment journey with mutual funds and then later graduate to direct stocks if you feel confident. Second, an investment amount of at least Rs 15 lakh makes sense for these curated baskets. Basically, these stock curation platforms are bridging the gap between the mutual funds and the PMSs,” says Sunil Singhania.

Another point of differentiation that works in favor of mutual funds is diversification. A mutual fund scheme can have 25-70 stocks in its portfolio, however, on platforms like “Smallcase”, the maximum number of stocks in a portfolio is 50. Another problem with these portfolios is the taxation and the rebalancing. Mutual fund investors are used to the fund manager taking the buy and sell calls in their portfolios. According to regulations, mutual funds are pass-through entities and they are more tax-efficient than these curated portfolios. If you buy one of these portfolios online and wish to make changes based on the recommendations, you will end up paying tax on each transaction. Over and above this, managing so many stocks, even if you buy 3 of such portfolios, can be difficult.

Apart from taxation, there are subscription charges that these platforms levy. These charges vary from platform to platform and from portfolio to portfolio. Mutual fund schemes, however, have a set expense ratio. Secondly, you can invest a minimum of Rs 500 in any mutual fund scheme of your choice. That is not true for a curated portfolio. Even though the platform like Small Case has some portfolios that allow a minimum investment of Rs 1,000 also, most of the portfolios ask for a minimum amount of Rs 50,000 to Rs 2.5 lakh.

In the end, investment managers say that these curated portfolios make sense for investors, who can not afford portfolio management services, but want to graduate from equity mutual fund schemes. So, if you are a retail investor who wants to keep your investment simple for the long term, if you are not well-versed with stock trading and most importantly, if you are a new investor, you should invest only in equity mutual funds to take exposure to stocks. “Apart from trading, if you don’t understand the basics like what is a short delivery, it can get tricky for you. So, we believe that this platform is not for someone completely new to direct stock trading. These portfolios make sense for investors who have spent some time in the market and have the intent to graduate to direct stock trading,” says Vasanth Kamath.