While Technology has made investment advisory affordable, retail investors are increasingly shifting towards picking model portfolios / smallcases from the days of individual stock picking. There are 100s of smallcases available on the Smallcase platform. Hence, we are writing this article to help you in selecting a smallcase. In this article we use model portfolios and smallcases interchangeably.

Risk Appetite:

Everyone should invest only as per his/her risk appetite. Model portfolios have equity allocation ranging from 0% to 100%. While aggressive investors are comfortable investing in smallcases with even 100% equity, and conservative investors should go for smallcases which have lower allocation to equity. Because of this wide-range of smallcases collection, it’s important to assess his/her risk appetite and invest accordingly. At Gulaq, we designed a risk profiling tool which helps investors assess their risk category and select appropriate portfolios. Here’s the link to the risk profiling tool

Investment horizon:

If you are looking for long term gains, never select concentrated portfolios. The concentration might be based on sectors, or themes or factors. Always select the portfolios which are diversified in terms of market cap and also in terms of how the portfolios are constructed. For Example, momentum portfolios are based on a single factor and hence risky in the long-term. Multi-factor investing based portfolios are better suited for long-term investments, as they are diversified across themes, sectors, and factors. This will help investors avoid the unnecessary hassle of timing their entry and exit in the theme based portfolios.

Backtesting results:

Take backtesting results with a pinch of salt. It is very easy to come up with a strategy which has performed well in backtests. Whether it will perform in live markets or not, is a totally different thing. Always give more importance to live results.

Analyzing Live performance:

When you see the live performance, always see how the portfolios performed during rising markets and during falling markets. Smallcase allows users to switch time periods from 1 Month to 5 Years, check how the small case is performing compared to different benchmarks across time periods.

Investment team:

Always see the team behind the portfolios. Lately because of the huge investor interest in the model portfolios, there are many portfolios being offered by 1-2 person teams who have just started operations. See the live track record of portfolios, the quality and experience of the team behind the portfolios, and size of the team.

Diversification:

A well diversified portfolio reduces the drawdown risk over long-term. While selecting a portfolio, watch out for what kind of strategy the portfolio is based on. For example, a theme based smallcase is likely to perform well as long as the theme is performing well. Hence, one must carefully consider how diversified the portfolio is and what is the time horizon they can look at based on the extent of diversification. Go for a well-diversified portfolio.

Influencers Trap:

A recent trend has started where influencers have started offering smallcases. Even though there might be a star fund manager behind the portfolios, many of them haven’t been able to keep up with the changing nature of the markets. While picking these smallcases, be cautious about their recent 2-3 years performance. If a fund manager underperforms over a 2-3 year period then surely you need to think twice before investing with them.

Subscription fee:

Have an understanding on how much investment you are likely to make in one year, and calculate the subscription fee as a percentage of your investment. Pick such a Small case, which doesn’t cost you more than 2-3% of your AUM.

Some portfolios tend to have lower minimum investment size, which makes the subscription fee a higher percentage of AUM. Don’t get carried away with subscription fee/minimum investment percentage, instead try calculating subscription fee/annual investment size.

There is no universal smallcase, which is the right investment for everyone. The above factors help you in the process of selecting the right smallcase.

Happy investing!

Kenneth

Kenneth is a proud native of sydney, born and raised there. However, he pursued his education abroad and studied in Australia. Kenneth has worked as a journalist for almost a decade, making valuable contributions to prominent publications such as Yahoo News and The Verge. Currently, he serves as a journalist for The Hear Up, where he focuses on covering climate and science news. You can reach Kenneth at [email protected].