Still Paying your Stock Broker for the Frills that are of No Benefit?

Still Paying your Stock Broker for the Frills that are of No Benefit?
25/09/2019

In the last few years since discount broking or no-frills broking took off in India in a big way, the trading landscape has changed substantially. Increasingly, retail investors, small traders and even aggressive traders prefer the economic model of discount broking. After all, when you churn your capital the brokerage costs multiply as does your statutory costs. In short, you end up paying the broker more. That is where no-frills broking comes in handy. The lower brokerage (near zero) also reduces the statutory costs and the breakeven for every trade becomes much finer and attainable. But there is a counter argument from full-service brokers in the sense that they offer frills to their customers, which discount brokers do not. What exactly are these frills?

But we offer value addition; say full service brokers

One of the standard arguments you will get to hear from the full service brokerages to justify their higher brokerage charges is that they provide value addition. They are not entirely wrong. Most full service brokers give you a plethora of add-on services. But do you really need them?

  • Research on companies and sectors is one of the major value adds that full-service brokers offer. Most brokers have a full-fledged team of analysts and chartists who identify cheap stocks to buy, rich stocks to sell and the ideal levels of entry and exit.

  • Full service brokers also provide trading calls, technical calls and pivot points that can enable a trader to churn money during the day. This is something most traders look for since most of them operate in the short end of the market.

  • A standard argument many full service brokers give is what if you get stuck in positions and you need an alternate plan, then discount brokers don’t advise. That is a service only full service brokers with advisory skills can provide.

  • Full service brokers have a physical presence across India either through branches or through franchisees.

Now if these look like smart and irrefutable arguments, then remember; these arguments are smart but not necessarily irrefutable. Here is why!

Smart arguments but not so irrefutable

A common question a lot of new customers, especially the young millennial crowd, ask is whether the higher brokerage they pay for full service brokers is really worth it. How valuable are the frills really? Let us look at the smart arguments and can they be refuted?

  • Research ideas are great but can you pinpoint an investor who became rich with broker research. Which broker asked clients to buy Havells in 1996 and had the conviction to ask clients to hold on till 2017. It does not work that way.

  • If you are trader, you need to be your own chartist and take your own trading calls. Instead of focusing on short term calls and pivot points given by your broker, invest in technical charting software and fine tune your skills, costs matter more here.

  • What happens if you are stuck in positions? The lesson of online trading is that risk management is a better strategy than hope. Measure your risk and cut your positions. You will never need to worry about rectifying stuck positions.

  • Do we really need a physical presence? When I can execute my orders on my mobile app, the app is indifferent whether I am in Mumbai or in Tuticorin. Similarly, the trader is indifferent to whether the broker has a branch in the area or not.

  • Finally, we come to the smart argument of holistic financial planning. Remember, the world of technology has taken massive strides in the last few years. Today an amalgam of artificial intelligence and machine learning can combine with big data to give you the right asset class mix, give you triggers and even help you execute seamlessly. Then where is the need for manual intervention and where is the need to pay steep brokerage charges to your full-service broker?

Do frills really matter?

That may be an individualistic question but the broad outline is that frills don’t really add much value. You may be paying for all the frills and might be just using one add-on service. Discount brokers are offering unbundled services that includes several tools and technology to help investors in decision making.

Investing is about patience and trading is about discipline. That is your responsibility. No-frill broking is a lot more transparent in that it separates execution from advice. In a nutshell, for most retail investors frills ideally should not matter!

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Top 5 Secrets of Successful Retirement Planning

Top 5 Secrets of Successful Retirement Planning
25/09/2019

Quite often, the very name of retirement planning is a misnomer because it starts when you start your career. But your retirement plan is likely to be most successful if it is started early, sustained in a disciplined manner and the risks are appropriately managed. Here are the essential five secrets of successful retirement planning.

Start early and rely on equity mutual funds

By now you must have read enough about the time value of money to be able to grasp this point. The bottom line is that the earlier you start, the longer you keep investing money. That is when the compounding effect starts playing out. Compounding means that your principal earns returns, the returns are reinvested and over time both your principal and returns get continuously reinvested. This may appear to be simple mathematics but the impact on wealth can be huge in the long run. Consider the impact of time on HDFC Top-100 Fund over different time frames

Fund Name

Investment Tenure

Monthly SIP Outlay

Total amount invested

Value at the end of tenure

Wealth Ratio

HDFC Top100 G

5 years

Rs.5,000

Rs.3 lakhs

Rs.3.74 lakhs

1.25 times

HDFC Top100 G

10 years

Rs.5,000

Rs,6 lakhs

Rs.10.73 lakhs

1.79 times

HDFC Top100 G

15 years

Rs.5,000

Rs.9 lakhs

Rs.27.21 lakhs

3.02 times

HDFC Top100 G

20 years

Rs.5,000

Rs.12 lakhs

Rs.106.67 lakhs

8.89 times

Data Source: Value Research

There are two things that logically follow from the analysis above. Firstly, as the tenure is increases, the power of compounding becomes more potent. Of course, this benefit will work best if you are invested in equity mutual funds. Debt funds or liquid funds will not do the job.

Adopt a systematic approach to retirement planning

What is meant by a systematic approach? In mutual fund parlance it is calls a systematic investment plan or a SIP. Instead of investing in a lump sum, you invest a small amount each month. In the above table, an investment of just Rs5,000 per month helps the investor create wealth to the tune of Rs.1.06 crore over 20 years. But why systematic investing? Firstly, it synchronizes with your cash flows. Whether you have salary flows or business income, it tends to be periodical. When you adopt a SIP approach to investing, you don’t feel the pressure as it synchronizes with your inflows. Secondly, it builds a discipline. You actually work out the monthly SIP requirements and then work backwards to structure your budget accordingly. Lastly, it is hard to identify tops and bottoms in the market and it also does not really matter. The SIP automatically evens out the volatility in the markets through a systematic approach.

Not just money, also plan your insurance needs

There are two aspects to insurance. Firstly, it is about insuring when your retirement plan is in progress. You must ensure that your family has enough medical cover to take care of medical and hospitalization needs. Of course, your life must be insured with a large enough term plan so that your family does not end up paying a steep price. Above all, assets and liabilities must be covered so that there are no nasty surprises.

The second aspect of insurance is taking care of insurance after retirement. You obviously, don’t require an aggressive life policy but a life cover will surely give comfort to your spouse. More importantly, ensure that the medical needs are adequately covered as that could pose the biggest challenge.

Ensure liquidity around milestones

We often do not give too much importance to this aspect but it is critical to make liquidity available when required. Let us take an example. Say that your retirement is due in 3 years from now and you are predominantly invested in equity funds. Now the risk is that when the equity funds actually come for redemption, the equity markets may be on a downtrend and hence the corpus may be 10% lower. This could put your plans off track. A better way is to migrate to debt funds at least 3 years in advance and shift fully to liquid funds one year ahead of the milestone. That way you may lose out on some returns but you don’t run the price risk.

Direct stock investments can add alpha to your retirement plan

Finally, retirement does not mean that you give up on equities. Have an online trading account and invest in stocks online. Don’t go for speculative stocks but quality stocks that can create wealth over time. You can start to invest in stocks online even when you are planning your retirement. You can also continue to invest in stocks after retirement as this can give a much needed kick to your portfolio returns.

Retirement planning goes beyond just allocating a fixed sum to an equity mutual fund. If you take care of these bells and whistles, you will have a much happier retirement.

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A 10-Point Checklist to Pick a Small Cap Stock

A 10-Point Checklist to Pick a Small Cap Stock
25/09/2019

How exactly do you define a small cap stock in the Indian context? There are various definitions but largely small cap is a term used to classify companies with a relatively small market capitalization. To be on the safer side, you can just consider stocks between Rs 2000 crore – Rs 5000 crore market cap.

Of course, you need to do your homework before you invest online in these stocks, but here are 10 things to check when you buy small caps in the stock market.

Look at past performance

You often see safe harbour statements that past performance is not indicative of future potential. While that is correct technically, the closest you can get to comfort in the case of these small cap stocks is the past performance of the company over the last 5 years. Ideally, avoid investing in small caps which do not have a five-year track record.

Focus on consistency of performance

More than the absolute performance, it is the consistency that matters. Prefer companies that have shown growth over the last five years and avoid companies that show violent fluctuations in financial performance. These can be quite tricky when it comes to projecting cash flows. Also consistent small caps get better valuations in the market.

Focus on market size and positioning

Typically, small cap companies are single product or single service line companies. They neither have the capital nor the management bandwidth to spread too thin. Hence the size of the market matters. But more than that, it is the positioning in the industry that matters. A niche positioning or some entry barriers created can make a significant difference to the company valuations.

Check volumes in the market

That is the golden test. While there are no hard and fast rules for volumes, the thumb rule is that the average daily stock market volumes are at least 5% of the market cap. So if the market cap is Rs2,000 crore then the daily turnover in the stock market should be closer to Rs.100 crore.  When you invest online, you can check this data in the trading platform itself.

Bid ask spreads are an important signal

Bid ask spread is the gap between the best buy price and the best sell price. The former is the price at which sellers can sell and the latter is the best price at which buyers can buy. The benchmark tick spread is 5 paisa or 0.05 on the trading screen. Normally, liquid stocks have bid-ask spreads of around 5 paisa but as you go lower in the market stakes, the spread keeps widening. When you select small cap stocks ensure that the bid-ask spread in normal trading conditions does not cross 10 paisa. The moment you allow that, it adds to your risk when you invest online.

Check the bulk deals for intraday deals and promoter deals

Why are bulk deals so important for small cap stocks? There are two reasons. Firstly, bulk deals report all deals above 0.5% of the outstanding shares, irrespective of delivery or intraday. If you look at the bulk deals of small cap stocks, you normally find a flurry of intraday trades in some stocks indicating that the stock is highly speculative and could be potentially volatile. Also check if promoters are too active in selling the stock, details of which are there in the SAST disclosures.

Check for management quality and commentary

These are two different aspects but equally important in small cap stocks. Stay away from small caps where the management has shown serious lapses in corporate governance, disclosure practices etc. Also avoid managements that have failed to deliver on past promises. Small caps are overly dependent on management commitment. In fact, reading the MDA in the annual report gives you the sharpest picture.

Stay away from small caps with legal / regulatory charges

Before buying any small cap stock, do a quick system check on any pending issues with SEBI, any regulatory issues raised by SEBI / RBI, any pending investigations etc. If these are of a serious nature, it is best to keep away from such stocks. Normally, small cap stocks tend to get overwhelmed by such regulatory challenges and it is best to avoid such cases. Such cases are regularly reported on the website of SEBI.

Don’t ignore contingent liabilities and auditor qualifications

Contingent liabilities are potential liabilities like pending legal cases, open derivative exposures etc. Small caps in the stock market are extremely vulnerable to the negative impact of contingent liabilities. This gives you a quick idea of whether the business model has disproportionate risks built into it. Also be cautious if the auditor is not qualified or when auditors resign.

Check the cash flow statements

Of course, we are assuming that you have done your due diligence on the financials but the importance of cash flow statement is special in case of small cap stocks. Often, small cap stocks are under liquidity constraints as they are not able to churn their working capital effectively. Such credit pressures are visible in the cash flow statement.

Indian stock markets have been extremely successful in converting small caps stories into large cap winners. A quick check can go a long way.

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5 Factors to Look at While Selecting a Stockbroker

5 Factors to Look at While Selecting a Stockbroker
01/10/2019

Today, there is an abundance of stockbrokers offering their premium services to individuals wanting to accumulate wealth through the financial markets. As such, it is vital to choose a good stockbroker who understands the investor’s financial goals and guides him/her towards substantial returns.

Investors of today have two choices when it comes to stockbrokers: the traditional stockbroker and the discount brokerages. Traditional brokers charge a certain percentage as a fee, which differs with the type and size of the transaction. These brokers also send out trading tips and research bytes to the clients.

Discount brokerages, on the other hand, offer the standard services but at a fixed (flat) cost, i.e. regardless of the type and size of the transaction. They, however, do not offer any trading expertise, i.e. they do not give out trading or stock tips nor do they provide any insights into a trade. As such, they are suitable for those who prefer to self-educate themselves and take independent decisions.

Considering these, an investor has to carefully think about his/her requirements as well as exercise caution when choosing a stockbroker.

Here are five factors that would help a new investor in selecting a stockbroker who understands the financial goals of the investor.

  1. Credibility

    It is vital to perform a thorough background check on the stockbroker before entrusting them with your life savings. Finding out how many years the stockbroker has been in business, how it has performed in the past, what do the clients say about the firm, and any other relevant questions. This will help the individual to know more about the broker.

  2. Minimum Balance

    Investors need to maintain a minimum balance in their stockbroking account, and hence, it is vital to inquire about the same. This amount varies from broker to broker, hence, investors should choose a broker who not only provides the best services, but also has a low minimum amount threshold so that it does not tax their monthly budget. Other than the minimum amount, there should also be ease of access when it comes to depositing and withdrawing funds. Typically, brokerage houses have tie-ups with local banks which lets investors access their funds at any time. Withdrawals normally take three days to reach the client’s account.

  3. Technological Expertise

    Brokers who constantly update their platforms with the latest technology are able to give a unique advantage to the investor. There are also able to match the evolving needs of the investors and educate them on new features and solutions. Choosing a broker who consistently provides a stable and steady platform to their clients is a must.

  4. Availability

    A broker should be available during stock market hours to execute orders without any lag or delay or to address any issues that may arise on their electronic platforms. An investor should also check the speed and the stability of the website/mobile applications, especially during peak hours, to ensure that the pages load quickly and easily as even a split second can lead to the investor losing out on a profitable trade.

  5. Transparency and Capability

Transparency and capability are also important parameters when looking for the perfect stockbroker. There are many ways in which brokers charge their clients. Hence, the client has to ensure that all charges involved are mentioned in a lucid and transparent manner while opening an account. This will help you avoid any hidden costs that brokers might impose later. Apart from this, a broker should also have strong business policies that maintain the quality of the business.

When it comes to the capability of the brokers, investors should make sure that the stockbroker and his team have a strong background and passion for trading in order to have a hassle-free experience. When the team is able, it largely influences the business practices and delivers a profitable outcome to its investors.

Choosing the right stockbroker is vital to trading as the investor is entrusting their life savings into the former’s care. If a stockbroker or his brokerage satisfies the above-mentioned criteria as well as provides real-time customer support, add-on financial services and, as a bonus, is interested in enhancing the client’s knowledge of the markets, then engaging with them is a wise decision.

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How to Buy Stocks Online: A Step-By-Step Guide?

How to Buy Stocks Online: A Step-By-Step Guide?
by 5paisa Research Team 04/10/2019

Online trading has picked up in a big way in the Indian markets. To buy stocks online, the following steps are essential to understand how to go about the process.

1. Choose your online broker carefully

The first step to buy stocks online is to select your online broker. You have a choice of discount brokers and full service brokers and you can select one based on whether you want pure execution or are you looking for research and stock tips as well. Also check the follow-up services provided by the broker and the back-up order placing facility like call-n-trade, before making your choice.

2. Opening your trading and demat account

If you want to trade in equities, trading account and Demat account is a must. While online trading account is for executing transactions, the demat account is for holding shares when you take delivery. The process of account opening is quite simple and you need to provide basic documentation like proof of identity, address proof, cancelled cheque and PAN card. Once your account is activated and you reset your password you are ready to trade online.

Know: Difference between Demat Account and Trading Account

3. Next step is to fund your account

Whether you want to buy stocks online for short term or long term delivery or intraday; you need to fund your trading account. You can either fund the account through NEFT or IMPS or UPI. The online broker will permit you to place orders only after your account is adequately funded.

3. Screen stocks you want to buy before placing the order

One advantage of online stock buying is that you can read research reports, screen stocks on parameters like profitability, ROCE, ROE, among others and execute orders seamlessly. Many brokers also offer you the “call to action” facility. You can read the report or stock tips and directly execute the order from that place with a few clicks.

4. Select the price and select the right type of order

Once you are ready to place the order, you can take the help of online technical charts to identify the best level to enter the stock and also put stop losses accordingly. Try to get the best price possible. Take care of how you place the order. For example, if the market is volatile, try to place a limit order so that you can get the price of your choice or better. Alternatively, if you are buying in a falling market, use a market order to get the best possible price.

5. Once the order is placed, do the follow up work

Once the order is placed, your job does not end. Check with the order book if the order is reflecting properly. To check the status of execution, you must refer to the trade book. Only executed orders are shown in the trade book whereas the open orders are shown in the order book. Before the order is executed, if you are unhappy with the price, you can always cancel the order or even modify the order price and quantity. The discretion is entirely yours. Once the trade is completed, cross check with the contract notes in the evening and also do a weekly reconciliation with the demat account and the ledger account.

6. Finally, take care of security of your online trades

There are quite a few critical things to take care here. Firstly, ensure that your password is safe and as complicated as possible. Avoid writing down your password anywhere. Secondly, use dual authentication for your trading account and make it a point to log out of your trading account when not in use. Thirdly, you cannot let your hardware be compromised. Avoid downloading software and games from unknown sources. Update the anti-virus and anti malware regularly. Lastly, avoid using your online trading account at cyber café or via public wi-fi. They are not secured and can endanger your personal data and wealth.

These basic steps to buy stock online can go a long way in enhancing and enriching your online trading experience.

Check the latest guide on: How to invest in stock market for beginners

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How to Invest in Mutual Funds in Indian Markets?

How to Invest in Mutual Funds in Indian Markets?
07/10/2019

When you get down to investing in mutual funds, there is a problem of plenty. With more than 40 AMCs, over 2000 schemes and with each scheme having a growth or dividend option along with a Regular Plan and a Direct Plan, you can imagine how complex it gets. Your screeners on the website can help you up to a point but you still need to narrow down to the scheme that best suits your needs. That is where this process will come in handy. Before you make your choice of fund, go through the following process.

Narrow down to funds based on AUM

A small fund with a corpus of Rs.100 crore may be the best performer but the fund business may be hard to sustain for them. Such funds are best avoided if you have a long term perspective. You must ideally stick to larger funds that have been around for over 15-20 years in the business. Such funds and fund managers have gone through cycles in business. Also, a higher AUM reduces your expense ratio as it gets spread over a large corpus.

In equity funds, prefer diversified funds over thematic funds

The whole idea of investing in mutual funds is to get the benefit of diversification. Don’t let go of this benefit by selecting thematic funds. The last thing you want is the fund manager to introduce concentration risk into your portfolio. This rule applies to equity funds and to debt funds also. While equity funds must diversify across sectors, business models and quality; debt funds must diversify across quality, tenor, duration etc.

Select funds that are consistent as they are more predictable

Two funds may have given the same CAGR returns over 5 years but you must look at the consistency. A fund that has given annual returns around the CAGR is better than the fund that has given super returns in 2 years and negative returns in 2 years. When you buy an inconsistent fund, timing becomes too critical. If you get in one of their super years, you may be disappointed at the end of 5 years. That is why consistent funds are a lot more predictable and reliable.

Is it the fund manager skill that is rewarding you?

An equity fund manager has to be better than an index fund manager. At the same time you cannot have a fund manager with the risk appetite of a seafarer. But how do you verifiably measure this? A simple method is the out performance of the fund returns over benchmark index. But that tells you only one side of the story. If the fund manager has outperformed by taking on too much risk then the fund manager is not working hard enough. Sharpe ratio and Treynor ratio can calculate risk-adjusted returns. You can also use the Fama coefficient to measure whether the fund manager is generating returns out of his stock selection skill or through pure luck.

Check our SIP calculator and Lumpsum calculator before planning your mutual fund investment

Cost efficiency is the next thing to look at

Expense ratios on equity funds range from 2.50% to 2.75%. If you can save on these costs it can make a substantial difference to your returns in the long run. When you calculate the cost of the fund, include all relevant costs and that includes the TER as well as the exit load. Some funds may charge a lower TER but have a higher exit load. Such funds can become very expensive when you exit before the 1 year period.

Mutual fund must fit into your financial plan

In fact, your activity must begin with a financial plan and these mutual fund investments must fit into the plan. The question you need to ask yourself is, “Is this fund good enough for me”? Look at every fund from the perspective of your own goals; your return requirements, your risk capacity, tax status and liquidity needs. It is only when you apply this litmus test that the effort of navigating through a plethora of mutual funds actually becomes meaningful for you.