Online Broker

How to choose an online broker

Sandeep Singh
Posted online: Monday , June 11, 2007 at 1438 IST
Updated: Wednesday, June 29, 2005 at 1257 hours IST -->

How you bought and sold shares changed first with advent of screen-based trading and then with Internet trading. It wasn’t just ease of transaction, how much you paid to do those transactions also tumbled with each shift. Brokerage charges are set to fall further, as more and more broking houses play the price card to capture the ever-increasing investor volumes. Says Prashant Prabhakaran, senior vice-president, Kotak Securities: “An online platform allows for greater economies of scale, which is being passed on to investors.”

Reliance Money, with its much-awaited and much-publicised launch in April, has reset the price line and thrown down the gauntlet. The company has dumped the percentage-based structure, which has been the norm all these years, in favour of a subscription-based model. Says Sudip Bandyopadhyay, chief executive officer, Reliance Money: “The effort required to execute a 100-shares order is the same as that required to carry out a 10-shares order.” In Reliance’s entry-level package, if you used up only your delivery transaction limit, your effective brokerage would be just 0.05 per cent — one-tenth of the norm in percentage-based transactions.
With so many brokerages around, and each one having many pricing packages, it’s not easy to make an informed decision. After all, it’s unreasonable to expect you to go through the 30 packages from 10 brokers. Most of these packages have sub-limits and fine print, which compounds matters. In order to give you some handle on making that selection, we went through the packages of six leading brokers that have an online presence: ICICIDirect, Religare, Reliance Money, Kotak Securities, Geojit Securities and 5paise.com. All else the same, here’s a primer on what’s on offer and how you should make that selection.
The packagesThe universe of brokerage packages can be broadly divided into three:Percentage-based. This is the traditional structure, where brokerage is charged as a percentage of the transaction value. Screen-based and online trading, and competition, brought down brokerage charges on delivery trades to 0.25-0.75 per cent of transaction value, but it has since stagnated there. Some brokerages levy the demat charge separately, which bumps up the total transaction cost to 0.5-1 per cent. Says Ashu Madan, head of retail equity, Religare Securities: “The simplest package is still the traditional percentage-based one. The new packages are complicating matters for investors.”
Flat rate. The strategy of broking houses looking to making sweeping gains revolves around moving away from the percentage-based pricing structure, where your brokerage increases with the value of your transaction. A fixed amount is charged as brokerage regardless of the transaction amount. Kotak Securities, which introduced this last year, has two schemes. In the first, it charges Rs 20 for every delivery-based transaction of up to Rs 5,000 and derivative and margin trading of up to Rs 50,000. At the transaction ceiling, the effective brokerage works out to 0.4 per cent for delivery trades and 0.04 per cent for the others. In the second, there’s a monthly charge of Rs 499 and Rs 9 per transaction.
Subscription-based. Earlier this year, Religare and then Reliance Money went subscription-based, charging a lump sum for doing a certain volume of transactions over a certain period of time. For example, the Reliance entry-level package costs Rs 500 and is valid for two months. During this period, it entitles an investor to do trades worth Rs 1 crore.
There’s a rider, though. Within the overall limit of Rs 1 crore, you can do trades in the cash segment for only Rs 10 lakh; the remaining Rs 90 lakh is assigned for margin trading and derivatives. Still, if you used up your delivery transaction limit in those two months, your effective brokerage would work out to just 0.05 per cent of the transaction value — about one-tenth of the norm in percentage-based transactions. For higher-value packages, the effective cost works out even lower - 0.042-0.045 per cent.
In the percentage-based and flat-rate packages, you only pay for what you use. In the subscription-based package, however, you pay upfront. If you hit your trading limits, you get the benefit of those low rates. Conversely, if you trade significantly less than what you are entitled to, worse you don’t trade at all, you squander the brokerage paid.
The strategyWhich one of the three cost structures you should opt for depends on the kind of investor you are.The passive investor. You have inherited or built a portfolio and are sitting on it for the long term, occasionally adding to it. Since you won’t be doing too many trades, you want a plan that is low on fixed costs (joining fee and annual maintenance charges), even if it comes at the expense of high variable costs.
That eliminates the subscription-based package. That leaves the flat-rate and percentage-based packages, provided they don’t have high fixed charges like ICICIDirect — account opening charge of Rs 750, annual charge of Rs 500 and a brokerage of 0.75 per cent. By comparison, Religare’s Classic Account charges Rs 299 on joining, no annual fee and 0.5 per cent brokerage.
Dinesh Goyal, an investor who transacts up to Rs 1 lakh a year, had two options from Religare: the Classic Account and the Freedom Account, which has an annual fee of Rs 4,000 and no variable charge. Opting for the Classic Account was a no-brainer. “Even at 10 times my transaction level, I wouldn’t have reached break-even in the Freedom Account,” he says.
The flat-rate package is also an option, but it again doesn’t work out well if you are not maxing your limits. Take the Kotak deal, which charges Rs 20 for every delivery trade of up to Rs 5,000. If you do a trade worth Rs 5,000, your brokerage works out to 0.4 per cent. But if you transact for Rs 2,000, you still pay Rs 20, or 1 per cent.
The day trader. You run up volumes in lakhs every day, every week. Most brokerages charge 0.03-0.05 per cent for such trades. Reliance, however, is in another league. Its effective cost for an investor who uses the transaction limits will be 0.004-0.005 per cent.
The active investor. You do some trading, you also take delivery, except it’s difficult to pin down your transaction patterns. One week, you might not do anything at all. Another week, you might come alive. What you want are long-validity packages like those of Reliance and Religare’s Freedom Account. The Freedom Account, for instance, has an annual charge of Rs 4,000, which lets you do daily delivery transactions of up to Rs 40,000 and up to Rs 3 lakh in the intra-day and derivative segments. The validity period of Reliance plans varies from two months to one year (See interview on back page).
These three profiles are stereotypes, and your trading patterns and investor behaviour might see you overlap two categories. However, this template should enable you to find a plan that suits you. And that means looking at costs, as well as qualitative factors (See box: Costs apart...). It’s a buyer’s market — make the most of it.
$100 billion, but long way to goOn May 31, the Indian mutual fund industry had Rs 4,14,172 crore of assets under management (AUMs). On that day’s rupee-dollar exchange rate, that works out to $101.6 billion, the first time AUMs have crossed the $100 billion mark. Of course, that figure is notional (dependent as it is on the exchange rate) and ever-changing (AUMs can rise or fall). Also, while that figure captures the distance we have travelled as a community of investors, a deeper analysis of related numbers highlight just how far we have to go.
The 2007 fact book of the Investment Company Institute has ranked 42 major economies, based on their 2006 AUMs. In that, India was ranked 25, and way off the numbers of developed — the US manages 104 times more assets, the UK eight times and Japan about six times — and most emerging economies. The participation of small investors in mutual funds is still marginal. Exact numbers are not available, but debt schemes, which are dominated by corporate investors, account for 60 per cent of mutual fund AUMs.
Indian investors still prefer bank deposits. The total money invested in mutual funds is just 18.5 per cent of that invested in bank FDs. It’s up significantly from the 7.1 per cent in March 2003, but it’s still a far cry from the 60:40 split in favour of mutual funds seen in a developed country like the US. In the last seven years, while bank deposits have grown at a compounded annual rate of 19.7 per cent, mutual fund AUMs have grown marginally faster at 20.4 per cent. Clearly, while $100 billion is a milestone, it is just one of the first posts in a long journey.

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