The returns are close to those offered by saving bank accounts
In the last couple of years, many first-time investors opened demat accounts and started trading. Many investors leave some cash with their broker to trade when opportunities arise. But this money does not earn any interest. Here are a few ways to overcome this situation.
Fund transfers are quick
The easiest way to keep your money working is to only transfer as much as you need for buying stocks. These days, many of us use online fund transfers to send money to brokers. They, in turn, give real-time credits.
In fact, SEBI rules state that stockbrokers must settle the client’s funds lying in the trading accounts at least once in a quarter. This must be done by transferring excess or unused money in the broking account to clients’ bank accounts if no trades are placed in any of the segments of the market in 30 days through the broking account.
Buy units of liquid exchange-traded funds (ETF). Since, ETFs are listed on stock exchanges, your broker can buy them for you. Nippon India ETF Liquid BeES is one such scheme. For transacting in such ETFs, some brokers do not levy charges. But other charges such as exchange fee apply. The returns are also close to those offered by saving bank accounts.
“Investors can also park their money in liquid schemes of mutual funds and avail margin against them,” says Prakarsh Gagdani, CEO, 5paisa.com. The funds so parked earn money market return. Liquid schemes have a graded exit load up to the seventh day from the date of allotment of units. Also, the entire sale proceeds are credited to the account on the following day, if you place the order well before the cut-off time of 1-30PM.
Using stocks and mutual fund units as margin
These investments may sound a bit of hassle for a few investors. In that case they may use their existing investments as security and avail margin against it. You have to pledge the stocks held in your demat account with the broker. This can be done online by logging into your broking account. You can initiate a pledge request by selecting stocks you want to pledge. Depositories (NSDL/CDSL) send a link to you on email or SMS to complete the process by providing a one-time password. The pledging process can be completed in less than 10 minutes.
The broker gives a margin against the securities offered. While units of liquid funds get a margin of up to 90 percent of the market value, frontline stocks may get a margin of up to 70 percent. Brokers can change the margin on offer, in-line with their risk-management practices.
“By using the margin facility obtained against pledged stocks and mutual fund units held in your demat account, you can trade intraday as well, apart from dabbling in derivatives. You can also buy stocks on a delivery basis and the obligation can be settled by T+2,” says Anupam Agal, Head–Operations, Motilal Oswal Financial Services.
This helps you trade in a seamless manner without having to wait till the account gets funded. It is a good solution when you find it difficult to fund your broking account and you have a good stock (trade) idea, which might not stay around for long. Some brokers do not allow buying stocks for delivery. Hence you must understand the terms.
If you trade using the margin facility, then the broker charges interest to the tune of 16-24 percent per annum. This is in addition to the brokerage and other transaction costs incurred at the time of trading.
To avoid such charges, you can fund your account immediately as mentioned earlier. If the position you have taken starts incurring losses and the liability exceeds the margin offered, you have to bring in cash or additional margin. If you fail to do so, then the broker has the right to sell the securities pledged cover the losses in addition to recovering the interest due.Prudent use of cash and margin can help you trade in a seamless manner.
