Economising on transaction costs

Shailendra Saxena

In the context of stockmarket investments, it is often said that whether one makes money or loses money in a particular transaction, the broker always makes money. For active investors transaction costs add up to a lot. For passive investors too, transaction costs need not be nil. It is imperative to take cognisance of the fact that transaction costs tend to lower return on investment.

High transaction costs lead to lower returns. Therefore, if transaction costs are kept in view, calculated and curtailed, a higher return on investment will be possible. It must also be realised that a high degree of churning of portfolio does not necessarily lead to higher returns. In other words, an active investment strategy need not necessarily be always more rewarding than a passive investment strategy. Where necessary, transactions should definitely be entered into but the necessity of various transactions should be examined on a zero base. And expected returns returns on investment must necessarily be estimated afterfactoring brokerage/transaction costs.

Let us take a look at some of the specific measures that can be taken to contain transaction costs:

If volume of transactions in stockmarkets are high, discounts can be negotiated with brokers.

Dealing with sub-brokers implies incurring of higher transaction cost. But small investors, particularly in small towns, may not always find it easy or advisable to dispense with services of sub-brokers. But as ones volumes of transaction increases, possibility of dealing directly with broker, instead of a sub-broker, should be explored.

When buying or selling the units of open ended mutual funds, it will be useful to examine sales loads and exit loads, wherever such loads are applicable. To give an example, in case of recently launched UTI Bond Fund, if the units are offered to UTI for repurchase before holding them for one year, an exit load of 1.5 per cent of the Net Asset Value (NAV) will be levied accordingly, the redemption amount will standreduced.

For investments in equity when period of holding exceeds one year, gains become long term capital gains. Long term capital gains, it must be appreciated, reduce incidence of income tax an realisation of gains. This is so because income tax is levied on the gains which remain there after gains are adjusted for inflation. And income tax being another kind of transaction cost, reduces return on investment. Therefore, it pays to keep in mind the provisions regarding admissibility of long term capital gains.

When markets are depressed, it may be the right time to buy good shares at low prices. Lower prices will also attract lower brokerage charges. This will reduce transaction costs and increase return on investment.

In case of small savings schemes like NSCs, PPF and KVP etc., agents normally pass on a part of their commissions to investors. Incentives and gifts are also offered by agents whenever bonds are issued by institutions like ICICI, IDBI and IFCI. UTI agents also offersimilar concessions to investors.

Before withdrawing money from savings account it should be remembered that interest for the month is paid generally on minimum balance between the fifth and the last day of the month. Moreover, if money is deposited before fifth of the month, interest becomes payable on it for the whole month.

For bonds of financial institutions like IDBI, ICICI and IFCI, which are traded in secondary market, only endorsement and delivery are usually needed for effecting transfers and share transfer stamps need not be used.

Cost of ``discontinuation'' may constitute a high transaction cost and therefore, should be avoided. To give an example, if a National Savings Certificate (NSC) is not encashed on the date of maturity promptly, NSC will cease to earn interest till it is finally encashed and reinvested elsewhere. Therefore, discontinuations in the investment should be minimised to the extent possible. It should be remembered that even a passive investor has to undertakecertain minimum transactions viz. initial investment and redemption.

Trading in the demant segment: Dematerialisation of shares has opened up a new possibility for saving investment costs for regular investors on the stockmarkets. First of all brokerage fees are significantly lower in the ``Demat segment'' than the brokerage fees applicable in the ``Physical segment''. Stamp duty is nil in the demat segment as against 0.5 per cent in the physical segment. Even after taking into account depository participants transaction charges and custody charges, overall investment/transaction costs may work out to be significantly lower in the demat segment.

Therefore, it will definitely be useful for regular stockmarket investors to seriously consider the possible cost saving with dematerialisation.Transactions being inevitable in the area of personal investment, it will be quite useful for investors to minimise transaction costs and thereby increase the return on investment. So, let us introspect to be able totransact wisely.

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