Prabhat Kiran, a civil engineer in his early 40s, leads a busy life. Over the past few years, he has been serious about investing his money for his retirement as well as for important life-goals like his daughter’s education and marriage. However, lacking time for proper research when exploring different investment instruments, he has been investing mainly in the PPF scheme and fixed deposits, besides a little bit in mutual funds through SIPs. Lately, he has been fascinated by the skyrocketing equity markets. He wishes to invest directly in stocks.

For investors like Kiran, who have some idea of equity markets, but do not have time for the careful and tedious process involved in executing individual trades and building a portfolio, ready-made portfolios are a practical way to invest in stocks. Many companies offer ready-made portfolios in which you can invest based on any criteria of your choice. The criteria could be the sector where you see potential, the level of risk or your investment objective. Called by different names, such ready-made equity portfolios are today available from smallcase, ICICI Direct, Samco Securities, Motilal Oswal and Fyers, among others.

These are diversified baskets of stocks or exchange traded funds (ETFs) that are professionally tailored to reflect an investment plan, theme or idea. These baskets are created by SEBI-registered investment managers and analysts based on extensive fundamental and technical research. Instead of buying individual stocks, you can simply buy a ready-made portfolio and end up having all the stocks that constitute it. Unlike a mutual fund, you actually have complete control over the individual stocks that you hold in the portfolio. While only the fund manager can make changes to your mutual fund portfolio, a ready-made portfolio can be changed by anyone who holds it. It’s essentially like holding individual stocks without the trouble of buying them and managing them individually.

Moreover, these portfolios, often called “smallcases”, are cheaper than mutual funds, which charge expense ratios up to 2 per cent of the investment value. Ready-made portfolios usually incur only a small flat fee, which can be as low as Rs 100, plus the brokerage charges as per the terms of your demat account.

According to Atanuu Agarrwal, co-founder, Upside AI, mutual funds are pooled funds where the fund manager has complete discretion on the portfolio. Most investors do not track changes in portfolios and instead focus on overall performance figures. Index funds, offered as ETFs or as mutual funds, are simply passive vehicles that mimic the prescribed benchmark.

“While there are thematic and sectoral mutual funds, ready-made portfolios offer a much wider choice of strategies with investors having the option to invest in very specific themes,” says Agarrwal. “Operationally, the investor is intimately aware of the composition of the portfolio and any changes in it because typically the securities are purchased in the investor’s own brokerage account and have to be ‘rebalanced’ manually.” Once a user invests in their ready-made basket, they can track it at the portfolio level as well as the individual level in real-time, set up SIPs, invest more, rebalance when the original basket is updated and exit partially or completely whenever they want.

According to Vasanth Kamath, Founder of smallcase, India’s leading fintech start-up offering such portfolios called ‘smallcases’, these ready-made portfolios are different from other investment products because they offer diversification by design, while also giving the investor complete transparency and optionality of control. “Smallcases also serve as a healthy gateway to investing in direct equities without the volatility of individual stocks and the professional management available in other formats,” says Kamath. “Each smallcase (the ready-made portfolio) is curated and managed based on a specific objective, strategy or theme as highlighted in the respective smallcase rationale. Benefits include getting exposure to diversified portfolios of stocks and ETFs managed by professionals and SEBI-registered entities along with the transparency and optionality to control or tweak their composition. Also, with smallcases, there exist many strategies and themes not available in other formats.”

Fyers is another platform that lets investors invest in ready-made portfolios based on themes. Gopal Kavalireddi, Head of Research at Fyers, says ready-made portfolios called FYERS Thematic are powerfully structured portfolios “which are different in construct and purpose”. “The primary focus of these instruments is to invest in ideas, special situations or sectors that are evolving independently of the economic scenario,” he adds.

Unlike mutual funds, which base their equity allocation primarily on equity benchmark indices, thematic investing is about identifying distinct growth opportunities across a combination of market caps, sectors and industries. Investing in these ready-made portfolios can help in outperforming the indices by a considerable margin over a longer time frame, Kavalireddi claims. “The methodology is simple yet rigorous. The process starts with defining the stock universe and shortlisting sub-sectors and companies within it. Based on the business prospects, management outlook and a combination of quantitative and qualitative parameters, the overall situation of the company is laid out. This is followed by a projection of the financial performance over the next few periods. Each instrument is constructed carefully, catering to passive investors and active investors. These instruments are suited for investors of various risk profiles—conservative, moderate and aggressive,” he explains.

Most industry observers agree that 2020-21 was memorable because of the swift, strong and commendable recovery in markets following the vicious stock market crash in March 2020 due to pandemic-induced lockdowns. The recovery could be attributed in part to the enhanced participation of new retail investors due to availability of time and resources enabled by the shift to work-from-home, coupled with average performance of mutual funds over the past five years. However, as many new participants are not familiar with the research necessary for investing, ready-made portfolios, backed by research, offer the right avenues for availing investment opportunities.

Nikhil Kamath, co-founder and CIO, True Beacon and Zerodha, feels these structured ready-made products are gaining popularity as they are straightforward in terms of what they offer and tend to align an investor’s objective in a simple way. “For people who neither have exposure to equity markets nor requisite knowledge, these ready-made portfolios can be a great facilitating tool,” he says. “The benefit of investing in such products is convenience coupled with control. Most of these ready-made portfolios give you the option to opt for and against rebalancing, or say investing in a particular sector. Therefore, the possibility of slippage is negligible and monitoring is efficient.

These products might turn out to be helpful for people who do not have the bandwidth to manage their own investments and want equity exposure.”

However, investing in these ready-made portfolios come with their own sets of challenges and limitations. According to Kamath, the biggest challenge is that of “objective mismatch”, where you have a certain set of objectives when you initially invest and those objectives might change later, making the product unsuitable to your needs.

According to Agarrwal, the two biggest challenges are regulations and mis-selling. He feels additional clarity from SEBI is required on the mode and compliance requirements for research analysts, registered investment advisors and portfolio management services to offer such services to retail clients. “In some ways, mis-selling is rampant in this space. Cherry-picking, misuse of backtests, frequent changes in investment philosophy, inadequate research and testing of products are just examples. Surely, some of these are also prevalent in mutual funds, but lack of a well-defined regulatory framework means that the proportion of bad actors is higher in this space,” he says. As a note of caution, Agarrwal quotes Warren Buffet to say that while everything looks rosy during a bull run, it’s only when the tide goes out that you learn who has been swimming naked.

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Features of Ready-Made Portfolio Investing

• Easy and simple method to invest
• Based on either unique, emerging or well-proven business ideas
• Thoroughly researched portfolios, based on technical and fundamental parameters, along with an in-depth qualitative analysis
• Lower costs compared to mutual funds
• Offer customisation, depending on the risk profile of investors
• No management fees or hidden costs
• Provide complete control over an investor’s portfolio, with decision-making power resting with each individual investor
• Ideal for new investors as well as passive and active investors

vishav@outlookindia.com