Is this route worth exploring for small investors? The returns are certainly quite attractive. The best performing small-case portfolio Value & Momentum run by Windmill Capital has risen 155% in the past three years (see graphic). This is much ahead of the 50.2% rise in the BSE 500 but comparable to the 158% growth registered by Quant Small Cap Fund, the best performing mutual fund during the same period. Can these curated baskets of well-chosen stocks replace mutual funds in your portfolio? Let’s find out.
How does it work?
Curated portfolios are typically a research-driven basket of stocks or ETFs reflecting a particular idea, theme, goal, investing style or strategy. These are created and managed by investment professionals registered with SEBI. To invest in curated portfolios, you may go via any of the brokers that have a tie up with either Smallcase or WealthDesk. Both platforms are directly integrated with top stockbrokers, including Zerodha, Upstox, Angel One, Securities, ICICI Direct and Kotak Securities. New-to-market investors can sign up with a platform and select a suitable broking partner. Once your account is set up, you can browse the catalogue of portfolios and select the one that suits your requirement.
The platforms briefly outline the investment rationale for every idea or theme as also the methodology behind the portfolio construction. Investors can see its performance record relative to a benchmark index. But details about the portfolio holdings is made available only after you subscribe. Once you sign up, you can purchase the entire basket of stocks with a single click. The platform will place buy orders for all securities in the basket via the broker, which will get executed immediately depending on the prevailing liquidity.
“The tech behind the platform and direct integration with brokers facilitates seamless one-click purchase of the entire basket,” says Vikas Gupta, Chief Investment Strategist of OmniScience Capital, which runs 21 smallcases of multiple strategies. The shares are directly credited to your demat account the next day. If a few orders are not fulfilled, fresh orders are placed to ensure the investor’s basket aligns with the curated portfolio. Investors can even set up SIPs in each portfolio, where they can put in a the chosen basket after the initial investment.
They can also exit the entire basket at any time or choose to sell individual stocks within the portfolio separately. Curated portfolios are closely monitored by the experts who run them. These are rebalanced periodically—either at the portfolio manager’s discretion or at specific intervals—to ensure that the portfolio remains aligned with its broader theme or strategy. Existing investors are sent a notification to rebalance the portfolio, by buying the incoming names and selling the outgoing companies—again at the click of a button. Smallcase gives investors the option to accept or reject the rebalancing advice. You can skip the update if you do not want to apply it, points out Anugrah Shrivastava, Co-founder, Smallcase Technologies.
Rebalance advisories issued by the managers is made available on the platform by the end of the trading day. The related communication is sent to investors on the next market day. On WealthDesk, you need to accept and execute the modifications if you wish to stay invested within the subscribed portfolio. In case you do not wish to rebalance, you may exit the WealthBasket or simply continue to track your existing investments within the WealthBasket. Rebalancing updates on WealthDesk are issued during market hours.
How do investors benefit?
Curated portfolios allow investors to venture beyond plain vanilla equity mutual funds. Individuals who would otherwise find PMS offerings unaffordable, can tap the investing expertise of the same professionals who run portfolios for HNIs. While the minimum investment in PMS services is Rs.50 lakh, curated portfolios have a much lower threshold at Rs.100-1,000 (see graphic).
They also allow access to unique themes or investing styles that may not be available in traditional mutual funds. Ujjwal Jain, Founder & CEO, WealthDesk, remarks, “A lot of portfolio innovation happens in curated portfolios offering investors a chance to tap differentiated ideas.” Portfolios built around concepts like “Monopolies”, “Penny Stocks”, “Dark Horse Pack” can be tapped via this route. Targeted sector-specific themes like “Specialty Chemicals” and “Insurance Tracker” or ideas like “House of HDFC” and “House of Tata” are also on offer.
Curated portfolios also bring differentiated styles to existing mutual fund offerings. For instance, the index-driven factor strategies offered by mutual funds are interpreted and run differently by fund managers. Similarly, sector or theme-based portfolios by experts provide another alternative to corresponding offerings by mutual funds.
Investors must note that unlike mutual funds, curated portfolios allow a free hand to the fund manager. He can construct and run the portfolio without restrictions. The investor is also free to customise the basket to his taste, by adding or removing any names from the portfolio, or modifying the weightage of individual scrips in the basket. “The user can customise the portfolio at the time of initial purchase as well as during rebalancing,” points out Shrivastava.
This allows for greater control on what goes into your portfolio, compared to a mutual fund. Besides, since the shares bought in the curated portfolio go directly into the investors’ demat account, investors retain discretion on timing of exit as well as exercise the choice to sell all or only a select few. In case a particular stock isn’t performing well, the investor can sell it and continue to hold the remaining stocks in the basket.
Further, dividends from the stocks in the portfolio are credited directly to the investor’s bank account. A key benefit is that one can invest at any time during market hours, which lets an investor take advantage of dips during the trading day. In mutual funds, investors get to purchase units at the NAV price which is computed at the end of the trading day.
What are the pitfalls?
The investor experience from the curated portfolio hinges on whether they are able to mirror the curated basket. While investors get a readymade portfolio and regular rebalancing calls, the onus of execution is on the investor. Any delay in rebalancing can lead to missed opportunities and deviation from the risk profile of the original basket. This may leave a gap between the actual investor return and that of the curated portfolio. “It is critical that investors follow in the footsteps of the fund manager. If they waver, they will lose track,” warns Santosh Joseph, Founder, Germinate Investor Services.
Further, the flexibility afforded to the investor to customise the expert-curated portfolio to his liking can be detrimental to his own interest. Even if you have the freedom to pick and choose, it is best to take the advice you are paying for in its intended spirit, suggests Gupta. “When a doctor prescribes a set of medicines for a disorder, it is in the patient’s interest to take it as recommended as they work well when taken together in entirety.” Rebalancing a curated portfolio is also less tax-efficient compared to mutual funds.
Rebalancing done by a mutual fund has no tax implications for the investor. But there will be a tax liability when selling individual stocks forming part of the curated portfolio during rebalancing. Dividends from stocks in curated portfolios are fully taxable as income, but you don’t get taxed for the dividends received on stocks held by your mutual funds. Further, rebalancing via curated portfolio can be costly as it attracts brokerage fees and other costs every time you churn the portfolio. It is also pertinent to note that both platforms allow trades to be executed via market orders only. Limit orders are not permitted. So there is a chance of additional slippages in the form of unfavourable pricing in individual trades.
That the fund managers run these portfolios without regulatory constraints also heightens the risk for investors. Portfolio managers do not have to follow the risk-mitigating norms governing traditional mutual funds. For instance, curated portfolios face no restrictions relating to sizing of bets in individual stocks and sectors. Most take highly concentrated bets, some holding as few as 4-5 stocks. The focused exposure to a theme or idea may backfire if it doesn’t play out as expected. Besides, new subscribers to a fee-based curated portfolio get to know its composition only after subscribing to the portfolio. Mutual funds, on the other hand, disclose their holdings at the end of every month, so prospective investors have a fair idea of how the scheme is positioned before they get in.
What does it cost?
Charges differ on both platforms, though the platforms themselves do not charge the users directly. Some portfolios on both platforms charge no separate advisory fee either. The All Weather Investing by Windmill Capital is a popular free-access basket on Smallcase. However, some others charge recurring fees, which can be a flat amount or a percentage of the corpus value. This fee is stated and charged upfront to the user when they subscribe to a fee based portfolio.
Besides, the buying and selling itself will attract the usual brokerage rate charged by your broker, apart from depository and other charges. If investing via discount brokers, you will be able to execute the transactions at zero brokerage cost as these charge nothing for delivery trades. All portfolios have a minimum investment threshold, which varies across platforms (see graphic). Among small-cases, the lowest minimum outlay goes as low as `100 and extends up to Rs.1 crore.
What should you do?
Investing through expert-curated portfolios provides a middle-ground between buying individual stocks on your own and investing via mutual funds. Buying stocks directly involves a lot of homework and regular monitoring. Mutual funds take care of this problem but leave the investor with no control over the portfolio, and no actual ownership of stocks. This is where tailored portfolios come in. “Curated portfolios are the missing piece of the investing puzzle,” contends Joseph.
These provide a way for de-risking the activity of buying stocks directly with the guidance of a professional money manager. “It allows the investor to explore stocks confidently and make informed choices,” says Jain. Even for fund investors, this is a worthwhile option for exploring specific themes or ideas that are often not adequately represented in regular mutual funds. The attraction for specially curated portfolios is clear from the performance charts. The top performers among these ready-made baskets have notched up staggering returns in a short period of time. The Green Energy smallcase by Niveshaay has fetched 74% return over the past one year. The best performing mutual fund rose 36% over the same period. But investors should avoid simply chasing returns or fancy themes.
Investors should take this route only if they understand the risks and nuances of the market. Shrivastava asserts, “Curated portfolios are more hands-on and require better understanding of the market. First time investors with little knowledge of the market are better off with mutual funds.” Further, this route demands the same due diligence as when investing in funds. Investors must evaluate the managers carefully, stick to names with proven credentials and not blindly invest in a basket that appeals to them. “The success of any strategy or idea depends entirely on the manager’s expertise. If the manager is not capable of executing the idea, it will fall flat,” cautions Gupta. Do not be lured only by the return generated by a particular basket either.
Many of the curated portfolios have a short track record. Stick to managers who run a clear investing philosophy and process to execute the strategy. Joseph argues, “In a bull market, anything runs. It is only when the tide turns that things get tricky. It remains to be seen how many of these managers have the bandwidth to sit through the difficult times.” Investors must also be mindful of the costs when buying flat-fee based portfolios.
For these to be cost-effective, the investor must put in enough capital, otherwise the fees will eat a chunk of the capital. For instance, the yearly subscription fees for some of the high performing fee-based curated portfolios on Smallcase range from Rs.6,000 to Rs.13,500 a year. For these sums, investors must deploy at least Rs.2.5-5 lakh to keep the effective cost below 2-3%. This is the typical expense ratio charged by actively managed equity funds.
Finally, do not think of curated portfolios as an alternative to mutual funds. The two are very different and neither is a substitute for the other, observes Shrivastava. “Do not take this route unless you have experienced equity markets through funds,” insists Gupta. “But if you invest only in direct stocks, it may be a good idea to move to curated portfolios immediately.”