Where to Invest: Small Cases or Mutual Funds
Mutual funds are a very popular investment option with retail investors. However, small cases have also started to catch investors’ fancy. Mutual funds are not the same as small cases, even though they might look the same.
This article will look at the difference between small cases and mutual funds and help you decide what options are suitable for you.
What is a small case investment?
In small-case investments, fund managers invest in different baskets of stocks, which can be known as a portfolio based on the themes or industry, depending on your financial requirements. Themes or industries might be information technology, green energy, or the healthcare sector.
In this type of investment, your portfolio will be created by investing in individual stocks managed professionally. You must open a Demat account, stocks will be credited to your account directly, and there will be no entry and exit loans, as you can sell or rebalance your portfolio anytime during market hours.
What are mutual funds?
Mutual funds are an investment tool in which fund managers pool your money and invest in different stocks and fixed-income securities. Mutual fund companies collect money from you and invest according to similar investment objectives. Mutual funds divide their investment portfolio into different categories as schemes and allot mutual funds units to the investors.
You have to bear the exit load when selling your units. You might invest in equity and debt funds and get exposure to stocks and bonds, but you don’t have to open a Demat account to buy mutual funds units and pay annual maintenance charges.
Differentiating points between small case and mutual fund investments
Here are a few differentiating points that generally confuse you and will help you make informed investment decisions on whether to buy mutual fund units or invest through small case investments.
Minimum Investment Amount
The minimum investment amount of the different small cases will depend on the underlying constituents, which will vary from basket to basket.
However, in the case of mutual funds, the minimum investment amount is Rs.500. You can invest in mutual funds through Systematic Investment Plan (SIP) with a minimum of Rs. 500. Some funds also offer a SIP of Rs.100 in funds for economically weaker sections of the society. In the case of lump sum investment, the minimum investment amount is Rs.5000.
So, when you invest in one or more mutual funds, you don’t have to worry about the minimum investment amount.
Small case investment majorly focuses on the equities of the companies, and equity comes with inherent risk. Also, small-case investment is more concentrated on theme-based investment. If you’re bullish on a particular theme, then a small case investment may be a better option for you. But, concentrating on a particular theme restricts the diversification criteria, which might expose you to more risk. If your risk appetite is much lower, then you may go ahead with mutual fund units.
Cost of investment
A management fee is the most concerning aspect of the investment as it affects your net rate of returns on investment. In the case of mutual funds, the expense ratio is capped by the SEBI up to 2.5% of the total fund value. But in the case of small case investments, it depends on the Registered investment advisor (RIA) to RIA. You can compare your cost before making an investment decision.
Access to the direct benefits of being a shareholder
In the case of mutual funds, you will not be able to get immediate financial benefits such as dividends or bonus shares from the companies where your fund manager has invested your funds. While in the case of small case funds, as your shares are already credited into your Demat account, dividends, or bonus shares, will be credited to your account on a real-time basis.
Typically, most of the small cases invest in stocks. So, if your investment portfolio comprises only of small cases, then your portfolio will be prone to volatility. However, when you invest in mutual funds, you can invest in mutual funds that invest in other assets, such as debt and gold. In this case, you can manage the risk of your portfolio.
Small case and mutual funds have their set of strengths and weaknesses. However, if you are new to the world of investment or don’t have expertise in tracking various sectors, mutual funds might be the best option for you.
This blog is purely for educational purposes and not to be treated as personal advice. Mutual funds are subject to market risks, read all scheme-related documents carefully.