Churning

Importance:

Churning negatively affects investors by increasing transaction costs, lowering returns, and causing unnecessary risk. It violates the fiduciary duty brokers have to act in the best interest of their clients. Investors in India should be aware of this practice and monitor their accounts to avoid falling victim to it.

Key Features:

• Excessive Trading: Brokers engage in a high volume of trades that are unnecessary for meeting the client’s financial goals.
• Commission Motivation: The primary aim of churning is to earn more commissions, regardless of the client's best interests.
• Violation of Ethics: It is a violation of SEBI regulations in India, where brokers must act in the client’s interest, and churning is viewed as a breach of fiduciary duty.

Example:

Suppose an investor opens a Demat account and invests ₹10 lakh in equities. If the broker frequently buys and sells shares without any clear reason or market justification, resulting in higher commissions and no real portfolio growth, this would be considered churning.

Benefits (None):

No real benefit to the investor: Churning solely benefits the broker by generating more fees.

Challenges for Investors:

• Increased Costs: Excessive trading increases brokerage fees, which reduces the investor's returns.
• Unnecessary Risks: Frequent trades may expose the investor to unnecessary market risks.

Tips to Avoid Churning:

• Monitor Your Account: Regularly review your trading statements for excessive activity.
• Ask Questions: If there is a high volume of trading, question your broker about the reasons behind it.
• Choose Fee-Based Advisors: Opt for advisors who charge a flat fee or work on a fee-only basis, reducing the incentive for excessive
• Churning is harmful to investors, and it’s essential to remain vigilant to protect your portfolio from this unethical practice.