Fractional Shares: A Way to Access Premium Stocks in India

In the world of finance, fractional investing has emerged as a revolutionary concept, granting investors the opportunity to claim partial ownership of high-priced stocks. This ingenious approach is particularly enticing for those who aspire to invest in specific companies but face budget constraints that prevent them from purchasing complete shares.

Exploring Fractional Investing

At its core, fractional investing introduces a novel perspective: the division of a single share into smaller, affordable portions. This strategy offers investors an unprecedented gateway to coveted stocks and enables them to establish diversified portfolios even with modest investments. Before delving into the feasibility of fractional investing in India's secondary market, let's first dissect the merits of adopting this innovative investment technique.

The Advantages of Fractional Investing

1. Access to Esteemed Companies

Imagine gaining entry to esteemed companies that are renowned for their remarkable performance. Fractional investing has the power to transform this dream into reality. India boasts some of the most valuable shares, including industry giants like MRF, Page Industries, Honeywell Automation, Shree Cement, and Nestle India. Unfortunately, the prohibitive cost of these shares – currently trading at prices like INR 97,650, INR 38,855, INR 40,064, INR 25,253, and INR 21,838 respectively – presents a barrier for many average investors.

2. Diversification and Risk Mitigation

Diversification is a cardinal rule in portfolio construction, engineered to minimize potential losses. Fractional investing, with its capacity to facilitate ownership of multiple high-priced stocks in smaller fractions, stands as a formidable ally in risk reduction. By embracing this approach, investors can thwart the pitfalls of a concentrated portfolio, which often stems from exclusively holding one or two stocks. Consider this: if you're aiming to build a INR 5,00,000 portfolio and desire shares in companies like MRF or Page Industries, limiting your investment to just a few stocks could leave you vulnerable. A diversified approach is key.

Exploring Fractional Investing in the Indian Context

Is Fractional Investing Viable in India?

Basavaraj Tonagatti, a certified financial planner (CFP), sheds light on the current scenario, stating that Indian law does not presently accommodate fractional investments. Investors are mandated to purchase whole shares. However, potential change is on the horizon, as the Ministry of Corporate Affairs in India contemplates amendments to the Companies Act to usher in the era of fractional shares and investments.

Fractional Shares: A Context for India

The proposed changes to the Companies Act aspire to address the challenge posed by exorbitant share prices, which inadvertently hinder retail investors from engaging with specific companies. Moreover, the amendments could also harmonize with situations where fractional shares naturally emerge.

In the Indian context, companies often bolster liquidity by augmenting the number of shares without altering the stock's intrinsic value. This strategic maneuver is known as a stock split, designed to adjust a stock's face value. For instance, if a 1:10 split is executed on shares with a face value of INR 10, the face value diminishes to Re 1. Essentially, a single INR 10 share becomes ten Re 1 shares. However, the adjustment carries a trade-off: while share prices decline proportionally, the overall value of your holdings remains unchanged. For example, a share previously priced at INR 240 will become INR 24 post-split. Consequently, a 1:10 share split results in an increased availability of shares, amplifying stock liquidity and rendering prices more accessible to investors.

Exploring Fractional Investment Possibilities for Indians

Although fractional investing is yet to gain traction in the Indian stock market, Indian investors can leverage global markets to partake in this phenomenon, particularly through established US corporations. Notable entities like Facebook, Amazon, Apple, Netflix, and Google – often referred to as FAANG stocks or Big Fives – boast substantial share values. For instance, an Apple stock currently trades at USD 172.07.

By harnessing online trading platforms and brokerage services, Indian investors can establish US brokerage accounts. Fulfilling necessary verification processes and funding these accounts under the Reserve Bank of India's Liberalized Remittance Scheme (LRS) empowers Indian investors to allocate funds to US stocks up to INR 1.75 crores.

Navigating Risks in Fractional Investing

Despite its undeniable appeal, fractional investing isn't devoid of risks. A significant portion of high-priced stocks, such as tech titans like Meta, are characterized by considerable volatility. The inherent possibility of financial loss remains a crucial consideration.

Fractional investing comes accompanied by brokerage commissions and fees, factors that can erode potential returns. Brokerage houses typically impose transaction-based charges, making multiple transactions for fractional shares a potentially costly endeavor. It's imperative to factor in substantial bank charges associated with the Liberalized Remittance Scheme for transferring funds to the US. Furthermore, Indian investors need to be cognizant of long-term capital gains (LTCG) and short-term capital gains (STCG) applicable in India for profitable exits from overseas stock markets.

Moreover, the potential illiquidity of stocks is a variable that demands careful contemplation before venturing into fractional investments.

In conclusion, fractional investing holds the promise of democratizing access to esteemed companies and fostering diversified portfolios even for those with limited resources. While it carries its own set of challenges and intricacies, the potential to tap into high-value stocks remains an attractive proposition for investors willing to tread the path of innovation.