Zerodha CEO Nithin Kamath on March 21 explained how the company's zero brokerage policy on equity delivery saved between Rs 2,000 crore and Rs 20,000 crore in investor wealth over the last 10 years. Taking to X platform (formerly Twitter), he said that the company has stuck with the policy despite "extreme pressure" to change the stance as option trading volumes have plunged significantly in recent past.
Zerodha had first decided to completely wave off the brokerage fee on equity delivery in December 2015. Before that, the company charged brokerage fee lower than 0.1 percent or Rs 20. "This move was to change our image from a broker just for speculation, which was the case back then. A lot of people (sometimes even I) wondered if this would just be a short-term experiment or if we could go on like this forever. Well, it's almost 10 years since and even though there is some pressure with the options business going down significantly in the last 6 months, we have been able to continue offering Zero brokerage," Kamath said in a blog post.
He further explained that if the company charged its normal rate of 0.1 percent or Rs 20, or the market rates of 0.1% or 0.3% without a cap, then that would have impacted investors' wealth in the range of Rs 2,000 crore to Rs 20,000 crore.
Kamath noted that the biggest mistakes both investors and traders make is ignoring the significance of costs to their overall returns. He further added that costs are one of the biggest drags on realised returns. "This ignorance of costs is because of percentage blindness," Kamath said. A brokerage of 0.5 percent seems insignificant, hence most people tend to ignore it. "The irony is most people don’t even make enough to recover their trading costs," he further said.
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Kamath noted that costs are the first obstacle to profitability. "If your strategy involves just a few transactions a month, the costs quickly add up… So, being conscious of costs can easily increase the odds of your profitability by a non-trivial margin," he said.
He further added, "I'm a big proponent of low-cost ETFs and index funds, so much so that the Zerodha AMC is especially focused on these products. But what boggles my mind is that a decent number of investors know the benefits of low-cost ETFs but still pay up to a 0.5 % brokerage. This is just percentage blindness in action. The whole point of ETFs is to save costs, but the brokerage on such transactions is already 1-5x the expense ratio of these ETFs!"
He concluded by advising investors to keep an eye on your costs. "Zerodha = Zero + Barriers (Sanskrit), not Zero + brokerage,” he said.
Also read: Zerodha co-founders Nikhil, Nithin Kamath gift their mother a Rs 1.5 crore Mercedes on birthday
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