Zerodha founder and CEO Nithin Kamath on Monday said the minimum return an active trader should generate to break even yearly on their portfolio is over 20%. Nithin points out that the return suggested is to offset the capital and the impact costs.
Terming the suggested return as indeed ‘high and tough’ for active traders, he adds, “What most traders don’t realize is that they pay a good chunk of their capital as costs.”
“If you add impact costs, the minimum return an active trader should generate to break even yearly on their portfolio is usually well above 20%. Yep, that high and that tough.”
The Zerodha CEO mentions capital costs as statutory costs like Securities Transaction Tax (STT), Stamp duty, GST.
“Impact costs or slippages (while this doesn’t even seem like a cost, it adds up quickly. Especially when buying options, will have a post on this soon). Trading costs like brokerage and exchange charges,” Nithin tweeted.
Nithin further adds that the break-even percent is a big challenge as as most traders take largest possible positions in every trade with their capital without considering costs. Nithin suggests that the way to reduce the impact of costs & increasing the odds of winning is by reducing the trading size (% of capital deployed per trade).
“At Zerodha the statutory costs incurred are more than trading costs ~20% of active traders incur ~80% of total costs. This must be similar to most brokerage firms,” said Nithin Kamath.
Kamath adds that the STT plus stamp duty paid by the Zerodha customers is more than the Income tax paid by the 25th largest company in India.
According to the reports, the STT collection for the June quarter is set to double from the year-ago period because of increased buoyancy and retail participation in the stock markets.
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