Brokerage cashbacks shouldn't tempt you to trade recklessly

We have all heard how the magic of cashbacks worked for card offerings in the country. It was later adopted by online retailers too. The same magic potion is now being served by stock brokerage houses in the country to lure investors into the stock markets during the testing times.

Motilal Oswal Securities is offering a 50% cashback on brokerage and Kotak Securities too is offering a 50% cashback on brokerage to its Pearl Account customers, which is meant for women investors. Axis Securities has been offering a Rs 500 cashback on brokerage to its existing customers for a successful referral.

Other firms such as SMC, RK Global, Zerodha too have been running cashback campaigns. The cashback mania is working so strong that a duo who had initially launched forexcashbackrebate.com, also initiated stockcashback.com.

Elaborating on motive behind launching stockcashback.com, Susanta Saren says, "The whole idea was to reduce trading cost and to make substantial savings without affecting the trading conditions. Cashback is mainly helpful for investors/traders who trade on a regular basis. It always increases a trader's bottom line and often even make the difference between profit and loss."

Presently, they offer cashbacks on their platform for seven stock brokers, Saren says.

Arun Choudhry, head – online and retail channel at Motilal Oswal Financial Services, says "If you look at the market cycle, typically investors are apprehensive about seeing the ups and downs in the market. The cashback offer is to entice the customer to try our services. The restriction of offering cashback is hence capped for the initial 30 days and at the max two months in select cases."

Most brokerage houses club the cashback offer with lower or zero demat account opening charges and hence seem to be targeting fresh customers. These cashback are offered for a limited time period of 30-90 days. Some credit the cashback on a monthly basis and few credit the cashback only after four months.

The web aggregator has seen some traction as it also offers cashback to existing customers for referring friends to the platform.

Saren says, cashback coupled with low brokerage is a win-win strategy. But today many push for price and do not think about service and platform connection. "Our aim is to guide investors in choosing the best broker and help them bag savings."

Established brokerage firms too have been seeing invetsors trickle in thanks to cashback campaigns. "We are seeing some kind of interest, when we are running the cashback offers, but not an enormous spurt in account openings that can be pinned to cashback offering," says Choudhry of Motilal Oswal Securities.

Though Motilal Oswal has been offering the cashback on brokerage for limited time period over the past two years, Choudhry says, "For us cashback isn't a business proposition as lower brokerage has never been our strategy."

The advertisements and deal offerings scream "50% cashback". However, the actual cashback amounts are restricted just like the credit card offerings. While Kotak Securities has a ceiling of Rs 2500, SMC Online restricts it at Rs 1500, Axis Securities has a limit of Rs 500 per successful referal. Though Motilal Oswal Securities does not specify any maximum cashback limit, it states, "Cashback will be available only on those accounts where minimum brokerage generated is Rs 1000."

Cashback has the power to fetch you discount initially on the brokerage amount. But you should not ignore other factors in the lure of cashback and free account opening. For instance, a customer who opted for a brokerage account based on cashback said, "The firm doesn't provide services that others brokers do like credit limit to trade, cheque pick up and drop, insights and advisory."

One should zero down on a brokerage house based on several factors. Deven Choksey, MD of KR Choksey Securities recommends, "Instead of looking for cashbacks investor should focus on value added services provided by the brokerage firm. This is because the investment portfolio stays for long-term. Though most investors today know how to invest, they are most confused about where to invest and hence they should be asking for advisory services, which offer better execution and research instead of cheaper brokerage."

He says that often lower brokerage would mean that you would be forced for a higher turnover and you lose your capital. "You gain in equity only if you retain your portfolio for a longer period of time and not if you churn it frequently," Choksey adds.

Keep an eye on the account closure charges and terms before opting for a cashback-offering on demat accounts.