ETMarkets Smart Talk| F&O STT, UPI charges and trading costs: Sandeep Neema on the hidden drag on retail returns

What if the biggest risk to your portfolio isn’t the next Fed move, a weaker rupee or even a market correction—but the way you trade?

With nine out of ten retail F&O traders losing money, the growing popularity of derivatives is raising serious questions about how investors are approaching risk. Add higher STT on futures and options, along with other transaction costs, and frequent trading can become an even bigger drag on returns.

So, should retail investors be trading less and investing for longer? And in a market where volatility, valuation differences and global risks are creating sharp winners and losers, does portfolio resilience now come down to patience and selectivity?


In this segment of ETMarkets Smart Talk, we speak with Sandeep Neema, Director and Fund Manager at PL Asset Management, about the real risks facing retail investors, the hidden cost of excessive trading, and why he believes the market is increasingly rewarding discipline over churn. Edited Excerpts -

Q) We have entered an environment where geopolitical risks, global trade disruptions, currency volatility and shifting interest-rate expectations can change the market narrative very quickly. What does portfolio resilience actually mean in 2026?

A) 2026 has genuinely tested this idea in real time, not just as a thought experiment. We've had a live war disrupt oil markets since February, the Fed swing from an expected hold to an actual 25-basis-point hike in September, and a rupee that's weakened past 95-96 to the dollar. If your portfolio needed all of that to go right to work, it wasn't resilient, it was lucky.

Resilience today means three things to us. First, owning businesses whose earnings don't depend on a single macro variable staying friendly, energy-sensitive sectors excepted, most quality Indian businesses have shown they can absorb a war-driven oil shock and a stronger dollar without their underlying earnings power breaking.

Second, it means genuine diversification across market-cap segments, not just sectors, this year, large-caps corrected sharply while mid and small-caps actually held up and, in some cases, grew earnings faster, so a portfolio concentrated only in the index would have missed that entirely.

And third, it means staying invested through the noise rather than trying to time an exit and a re-entry around every headline, domestic SIP investors did exactly that this year, and the data rewarded them for it.

I'd say the biggest shift in thinking for 2026 specifically is this: resilience used to mean holding cash or gold as ballast. This year has shown that domestic flows themselves have become the ballast, DIIs and SIP money kept buying through a war, a Fed hike, and an 11%-plus correction. That's a structurally different kind of resilience than India had even five years ago.

Read more: ETMarkets Smart Talk | Fed tightening returns: Ritesh Nambiar on what it means for Indian bonds and the rupee

Q) A possible Fed rate hike has suddenly become a key market risk. If the US Fed resumes tightening, what would be the immediate impact on Indian debt and equity markets?

A) This isn't hypothetical anymore, the Fed actually raised rates by 25 basis points in September 2026, taking the target range to 3.75-4.00%, a unanimous 12-0 vote, and its own dot plot signals one more hike before year-end. So we're not asking, "what if", we're already living the answer.

The immediate transmission is fairly mechanical. Higher US rates make dollar assets more attractive on a risk-adjusted basis, which is part of why FPI ownership of Indian equities has already fallen to a 17-year low of 15.1% and the rupee has weakened toward the 95-96 mark.

On the debt side, a widening rate differential between the US and India puts some upward pressure on Indian bond yields too since foreign investors demand a bit more compensation to hold rupee debt when dollar yields are rising.

But here's where I'd actually push back on the panic: the RBI has held its own repo rate steady at 5.25% for four straight meetings now, deliberately, even with the rupee under pressure, precisely to keep enough policy room rather than react to every Fed move.

Indian equities have already absorbed a genuinely tough combination this year, an active war, a real Fed hike, and sustained FPI selling, and domestic earnings still delivered their strongest quarter in Q1FY27.

That's a market that's proven it can take a punch. A further Fed hike would likely mean more near-term FII outflow pressure and rupee volatility, but I don't see it as a fundamental threat to India's earnings story, which is increasingly domestically driven anyway.

Q) Could a stronger dollar and higher US yields put enough pressure on the rupee to constrain the RBI's room for monetary easing?

A) To some extent, yes, and the RBI has essentially told us so already through its actions rather than any explicit statement. It's held the repo rate steady at 5.25% for four consecutive meetings now, a decision made against the backdrop of a genuinely weakening rupee, while maintaining a neutral stance in August even though inflation stayed comfortably below target through most of the year.

Read together, that's not indecision, it's a central bank deliberately choosing to preserve optionality rather than cut simply because the inflation print technically allowed it to.

I'd frame the actual constraint here as one of timing, not direction. The RBI's own FY27 GDP growth projection sits at 6.7%, inflation ran below target for sixteen straight months at points this year, and by any conventional reading, the underlying case for eventually easing policy is still very much intact.

What's happening is that the RBI is choosing to defer that easing until the rupee and the broader global rate picture stabilise, rather than pushing ahead and risking a sharper currency move. That's the behaviour of a credible, patient central bank managing sequencing, not one that's been backed into a corner.

And there's a structural offset here that I think gets genuinely underappreciated in this conversation: India's own domestic capital base has grown deep enough that the rupee and India's bond market are no longer purely hostage to whatever the Fed does next.

Record SIP inflows, record DII buying, month after month, straight through a war and a Fed hike, this is a market that has developed real gravity of its own. The RBI can afford to be patient precisely because the domestic growth and flows story no longer needs external validation the way it did a decade ago.

Read more: ETMarkets Smart Talk | US bonds offer attractive yields again: Nachiketa Sawrikar on the challenge for Indian equities

Q) Do you see UPI charges as essentially immaterial for long-term investors but potentially more relevant for high-frequency traders and smaller-ticket transactions?

A) Broadly, yes, and the new NPCI framework, effective from 15 October 2026, actually makes this distinction explicit rather than leaving it to interpretation. Ordinary UPI transactions, person-to-person transfers and merchant payments under ₹2,000, stay completely free.

For general merchant transactions above that, a 0.4% MDR applies, capped at ₹300. But capital market transactions specifically, payments toward mutual funds, securities, and stockbrokers, get a concessional MDR of just 0.02%, capped at the same ₹300.

Run the numbers on that: someone making a ₹1 lakh mutual fund investment via UPI pays roughly ₹20 in MDR. For a long-term investor putting meaningful capital to work occasionally, that's genuinely immaterial, a rounding error against any reasonable return expectation.

Where it does start to bite is exactly where you'd expect, someone transacting frequently in small tickets, or a high-frequency trader running the same rupee amount through the system dozens of times a month.

The fee structure is proportional to activity, not to the size of the underlying investment decision, so it's really a tax on frequency, not on capital allocation.

Q) Is there a risk that multiple small charges across the investment ecosystem could eventually become a meaningful drag on retail returns? (We also have STT.)

A) For a buy-and-hold, business-first investor, I genuinely don't think so, and the recent STT changes actually reinforce that view rather than undermine it. Equity delivery STT has stayed unchanged at 0.1% on both the buy and sell side through the Budget 2026 changes, the government deliberately left long-term, delivery-based investing untouched.

What it did change, sharply, was the F&O side: futures STT rose from 0.02% to 0.05%, and options STT rose from 0.10-0.125% to 0.15%, a policy explicitly aimed at cooling a derivatives market that had swelled to roughly 500 times India's GDP in notional turnover.

That's the tell. Every one of these charges, MDR, STT, brokerage, is calibrated by design to bite harder the more frequently you trade and the more speculative the instrument, and to barely register at all for someone making a handful of large, considered decisions a year.

Where the risk genuinely exists is for retail investors who've drifted into high-frequency trading or options speculation without realising how these small percentages compound against them trade after trade, that's a real and growing concern, and SEBI data showing nine out of ten retail F&O traders lose money should worry anyone who cares about retail wealth creation. But that's a behavioural risk, not a structural one for the kind of long-term, business-first investing we practise.

Q) Equity markets have delivered strong returns over the long term, but valuations in parts of the market remain elevated. Does resilience today require reducing equity risk, or simply becoming more selective?

A) Selectivity, not retreat, and this year is a near-perfect illustration of why. Nifty is down roughly 11.5% year-to-date, but that headline masks a market where sectors like Metals and Capital Markets delivered 20%-plus returns while Railways PSU and IT fell 20%-plus, in the same twelve months.

If you'd reduced equity exposure broadly at the start of the year expecting a uniformly bad market, you'd have missed genuine winners sitting right next to the losers everyone was worried about.

Large-caps at 19.5x are actually below their 5- and 10-year averages, it's specifically the Smallcap 250, near 34x, where valuation froth genuinely sits. So the honest answer isn't "the market is expensive, reduce risk", it's "parts of the market are expensive, be precise about which parts."

Add to that a genuine earnings acceleration, Q1FY27 delivered India's broadest earnings beat in four quarters, and the case for staying invested but being far more selective about where becomes even stronger.

Reducing equity risk broadly, in a market with this much internal dispersion, means giving up exactly the opportunities that dispersion creates.

Q) India's macro fundamentals remain relatively supportive, but global yields and capital flows can still influence Indian bonds. What gives you confidence in India's debt market over the long term?

A) A few things, genuinely, not just optimism for its own sake. India's FY27 real GDP growth is projected at 6.7% by the RBI, among the fastest of any major economy, and the RBI has kept inflation comfortably managed even through a war-driven energy shock, that's a fiscal and monetary backdrop most emerging markets would envy right now.

Credit growth running near a multi-year high, roughly 18-20% year-on-year, tells you the real economy is genuinely absorbing capital productively, not just on paper.

On the flow side, the domestic capital base is now deep enough to matter on its own terms. Mutual fund AUM, PMS, and AIF combined represent a genuinely large and growing pool of domestic capital that increasingly competes for and absorbs government and corporate debt issuance, reducing India's historical dependence on foreign bond flows to keep yields anchored.

And the RBI's own conduct this year, holding rates steady for four meetings despite rupee pressure and global rate volatility, tells you India's central bank has both the credibility and the room to manage this cycle deliberately rather than reactively.

Global yields and flows will always matter at the margin, but India's debt market today has a domestic anchor it simply didn't have a decade ago.

Q) What is the biggest portfolio risk investors may be underestimating today?

A) Honestly, I think it's the assumption that this year's large-cap correction and this year's dispersion are temporary noise rather than a genuine regime signal.

We've had a real war, a real Fed hike, a genuinely low FPI ownership level, and still, mid and small-caps outperformed large-caps, sector returns ranged from minus 27% to plus 28% in the same twelve months, and domestic flows never wavered.

Investors who assume the "old" pattern, buy the index, hold, wait for the next bull run, will reassert itself unchanged risk missing that the game has genuinely gotten more selective and more domestically driven.

The second risk, related but distinct, is underestimating how the smaller frictions in the system, F&O STT hikes, UPI MDR, elevated small-cap valuations, are quietly nudging capital toward more disciplined, long-term behaviour, and investors who keep trading and speculating the old way are going to find themselves paying more for the privilege while earning less for it.

The market is rewarding patience and selectivity more explicitly than it has in years. Underestimating that shift, and continuing to chase momentum or churn a portfolio the way one might have in a simpler cycle, is, in my view, the single biggest risk sitting in most retail portfolios right now.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times.)