Is basket investing in stocks better than mutual funds?Have you ever felt that the mutual fund manager is not buying the stocks that show most potential? Has your personal portfolio ever done better than fund managers? There are a lot of investors who think they can do a better job than a fund manager when it comes to investing. A strict list of stocks, single-stock exposure limits and a cautious stance that is necessitated due to many investors present in the same fund often can lead to mutual fund managers playing it safe.

Even if they pick great stocks that show superb performance, that show is drowned out in the crowd of 50-60 stocks with 1-2% weight. This is why brokerages in association with stock-picking firms have launched online stock baskets that let you focus on specific ideas, and control your exposure to high-conviction bets.

Stocks baskets for small investors

Both HDFC Securities and Axis Securities have tied up with a firm called ‘Smallcase’, a stock advisory startup backed by discount brokerage Zerodha.

The stock portfolios are a basket of stocks, selected and weighted intelligently to reflect a specific idea or strategy. You can invest in a stock basket, track it with a custom index value updated in real-time and set up an SIP in just a click. It is a quick, seamless and hassle-free experience of investing.

In HDFC Securities and AxisDirect platform, in addition to the catalogue of stock baskets (asset allocation, smart beta, thematic/sectoral) built by Smallcase, the respective brokerage’s research team has also created their own stock baskets, exclusive for their clients. HDFC Sec has Shubh Aarambh — a diversified basket of quality stocks to own for the long term, ideal for new investors and Diwali Picks 2018 — a basket of handpicked stocks for Samvat 2075. AxisDirect has baskets like Aggressive Model portfolio.

Separately, Karvy Stock Broking offers customisable thematic baskets with two to 20 stocks replicating a theme or market trend. Similarly, Reliancesmartmoney, powered by Reliance Securities, offers multiple stock portfolios with four to five stocks in each. Likewise, online stockbroking firm FYERS offers 100 plus unique portfolios, three investment profiles and very low minimum investment amounts when it comes to stock basket price.

Building the stock portfolio

Smallcase and stock baskets are a portfolio of stocks. Each portfolio consists of many stocks. Rather than punching multiple orders, investors will be able to include a basket of those pre-designed stocks with just one click. Do remember the price of a stock basket keeps changing with moving market rates of the constituent/underlying stocks.

Every stock portfolio is built on an investing idea. It could be a theme, sector, reform or just economic activity area. For examples, there are portfolios with stocks with high-income margin, highest net-worth, best performers, worst performers, strong or weak quarterly performance, sectors such as ITES.

Themes on stock baskets like debt-free, low volatility, hospitality, GST, growth at fair price, middle-class consumption, rural demand also exist. All you as an investor need to do is select the basket of your choice and press the buy button if you have requisite funds. In most cases, there are no or low fees. There could be regular brokerage charges that you pay for any equity trade.

Many stock baskets are ‘customisable’. So if you do not like a stock in a basket, some offerings allow you to add, delete or replace any stock from the chosen portfolio. This takes portfolio building to a new level.

Risks of basket investing in stocks

Most brokerages claim that equity baskets have outperformed the Nifty and average equity MF returns. But, the risk in such baskets is pretty high on account of a few reasons. One, these stock baskets may not be built like how portfolio managers do. There may not be any deep and organised method in building these stock portfolios. There may not be rules followed in terms of price relationship between portfolio constituents, asset allocation theory etc.

Two, such portfolios are highly concentrated. This makes it like a casino. You can win big and lose big too. There are stock baskets with 2-5 stocks available.

Three, brokerages have floated these stocks baskets to earn trading commissions. In MFs, agents and distributors gain trail commissions while fund-house levies fund management charge. While brokerages can always do what is right for their business, does a normal retail investor have the ability to build a portfolio like an experienced fund manager?

Four, frequent churning in stock baskets have tax implications. This can attract short-term and long-term capital gains taxes. Paying taxes will reduce your returns.

Five, these stock basket portfolios are generally very small as compared to a mutual fund. This small size has some investment implications. For instance, variance and value at risk in such a stock basket can be higher than a mutual fund.

Author
Rahul Sharma

Rahul Sharma is a contributing writer with RupeeIQ. He can be contacted on contact@rupeeiq.com