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Prepaid brokerage schemes work if annual trading amount is high

Prepaid brokerage schemes work if annual trading amount is high

What do you associate prepaid plans with? Cellphone service providers, Internet data cards, direct-to-home TV connections or gift cards at the most. Now, it’s the turn of brokers to go prepaid. Last week saw the launch of two prepaid brokerage plans— ICICIdirect.com and IIFL.

What is it

Instead of paying a brokerage every time you execute a deal, you can make a one-time deposit with the broker in advance and let him deduct charges as and when the transactions take place. You can replenish the deposit whenever you exhaust it.

Deposit limit: While the maximum deposit limit is 1 lakh for both ICICIdirect.com and IIFL, the minimum is 25,000 for ICICIdirect and 10,000 for IIFL.

Also See Taking Stock (PDF)

Validity: The IIFL prepaid card is valid for lifetime, but you have the choice of exiting earlier as there is no lock-in period and the unutilized deposit will be returned to you. The validity for ICICIdirect is 15 years and you cannot exit earlier. However, at the end of 15 years, the unutilized amount will be refunded to you.

Applicable to: As of now, the prepaid deposit can be used to pay the brokerage only on equities and derivatives if you are an ICICIdirect customer. An IIFL customer can use the plan across asset classes, including foreign exchange and commodities.

What you pay: If you sign up for the prepaid plan, the brokerage you will have to pay on delivery transactions would be 0.20-0.35% of the transaction volume in case of ICICIdirect and 0.15-0.40% for IIFL; higher deposits attract lower brokerage charge. For other users, the brokerage would be around 0.50% for both companies.

However, you will have to bear securities transaction tax, stamp duty, service tax, educational cess and other taxes additionally. These will not get deducted from the advance deposit. Also, the deposit can’t be used as margin for trading.

Prepaid customers will enjoy the same services as “pay per use" customers availed—relationship managers, deal advisers and research data.

Who should use this plan

Mint Money crunched numbers and figured out that a pre-paid package of 25,000, the minimum for ICICIdirect, would make sense only if your trading volumes are as high as 15 lakh per annum. Anything lower than that and you are better off in a fixed deposit giving 6% post-tax returns, assuming you are in the highest tax bracket of 30.9%, rather than blocking your money with a brokerage house.

Even if you tone down the amount to 10,000, the minimum for IIFL, you will need at least 6 lakh to benefit from the prepaid package.

Scale it up to the maximum of 1 lakh and the package will start making sense for you only if your trading volume is at least 60 lakh per annum.

Says Vishal Gulechha, head (equity product group), ICICI Securities Ltd, “These are best suited for those who are active in the market and shell out a brokerage of at least 700-750 per month."

So if you are an occasional investor in the stock market, stick to your regular brokerage package. In other words, the package may make little sense for the retail investor with a small investment ticket size.

Says Nandip Vaidya, president (retail broking), IIFL, “Out of our customer base of 900,000, almost 20-30% do not trade, they invest on a regular basis in the markets by picking up good stocks worth a fixed amount every month. If their volumes are high, they can opt for the prepaid plan."

Looks like the package will help the trading community.

Graphic by Yogesh Kumar/Mint


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