Your Money: Fractional investing benefits small investors

By P Saravanan

The concept of fractional investing will soon become a reality in India. The ministry of corporate affairs has formed the Company Law Committee which recommended the issuance of fractional shares. The framework for fractional shares investing is expected soon. As per the current norms, investors need to buy at least one share of a company whereas the fractional shares system allows one to put in a fixed sum of money to buy a particular stock.

What is a fractional share?

Let us assume that one share of company ABC is currently trading at Es 68,000 which may not be affordable for all. Under fractional investing, an investor could invest a partial amount, say Rs 100 or Rs 500, to buy a percentage of ABC company’s shares which might be affordable for the investor. When. investors buy a fractional share, they possess the ownership as well as the risk of loss like an investor with a full unit of share. Also, the investor will receive dividends based on the percentage of shares owned.

Why fractional investing?

Another interesting aspect related to investing in fractional shares is that it will open up a new arena for retail investors who till date have concentrated on exchange-traded funds and mutual funds. Once introduced, retail investors will now have an opportunity to invest in good companies which were earlier not affordable owing to the high price. This will help them to build a diversified portfolio which, in turn, will reduce the overall portfolio risks. With fractional shares, this diversification comes at a much lower acquisition cost. This does not necessarily mean that fractional shares are free from risks. But, it lowers the acquisition cost for the investors.

The US vs Indian context

The concept of fractional investing originated in the United States of America (USA). However, its operationalisation in the Indian context must be different. In the USA, the brokers act as the agents/brokers as well as the dealers/principal, and hence they have more flexibility…

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