Article

Brokerage
June 07 , 2012

Brokerage or Commission is what the agent or broker you deal with earns through the transaction. Usually, since he is paid by the mutual fund or insurance company, you do not get to see this number clearly. Yet, this number is very important since it is deducted straight from your investment, and affects your returns significantly.

A useful thumb-rule to keep in mind is that a brokerage of 1%-2% annually on your investment value is usually fine. Anything much above that should arouse your suspicions. There are two possible reasons:

  1. The product is bad (such as ULIPs), wherein the commissions can be as outrageous as 30% or more in initial years. You should avoid such products
  2. The broker is making you churn your portfolio. For example, if you pay a brokerage of 0.5% per trade in shares, and the broker makes you buy and sell 10 times a year (by giving a regular dose of 'tips'), you have paid him a 5% commission. This again is to be avoided if you want to make good returns

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