Churning and Trading Costs Eating Into Your Profits?

  • Market Overview

The Problem Most portfolios have demonstrated

  1. high churning costs
  2. data bias error where high past performers were added but failure to follow through dramatically impacted portfolios
  3. high tax impact- you get taxed at 15% for short-term capital gains and reinvest profits by paying higher trading costs

Our Solution: The motivational workforce small case (more info)

  1. Semi-Annual Rebalancing- The portfolio rebalances once every 6 months based on semi-annual fundamental performance
  2. Third-party ranking- The stock universe used for the portfolio is the workplace and employee motivation rankings from third-party sources like Linkedin, glass-door, and GPTW which keeps any stock selection bias at bay
  3. Compounding & low tax rate benefits- Initial weights are allotted based on “risk/ reward rationale” and the stock weights are allowed to float based on performance until the next rebalance. This allows the holdings to compound and grow and since we don’t rely on profit booking, the investor has tax impact only when we sell the holding probably after a few years

Letting the charts talk (source) The charts below show the impact of taxation vs deferred taxation in the case of a one-time investment and a SIP on an 8% p.a. The difference will increase exponentially as the rate of returns increases!

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