It is important to invest to secure your financial future. There are many investment alternatives for you to invest such as shares, mutual funds, and bonds. To invest in these securities, it is important to have a demat account. Read to find out more about a demat account, how to open it and the benefits of having a demat account.
What is demat account?
A demat account also known as dematerialised account is an important requirement in the stock market. It is an account in which you can save your shares and mutual fund purchases. Since a demat account can be accessed from anywhere, you don't have to carry physical shares or mutual fund certificates.
Prior to 1996, people used to hold physical share certificates against their share purchases. However, in 1996, the Securities and Exchange Board of India (SEBI) introduced a demat account. Hence all physical shares were converted into digital form/ dematerialised form and stored in 'demat' accounts.
Today, physical share certificates are no longer issued. A demat account is necessary to trade in shares and other securities. So, once you purchase the securities, they are reflected in your demat account and remain there until you decide to sell them.
Why is a demat account needed?
A demat account is necessary to trade in securities such as shares and mutual funds. However, it does more than just store your investments. Following are some of the reasons why a demat account is important.
- Since it stores securities in digital form, there is no risk of theft or damage.
- It eliminates unnecessary paperwork.
- Enables quick transfer of shares after a purchase and sale.
- Streamlines the process of trading and investing in securities.
Types of Demat Account
There are three different types of demat accounts available in India: regular demat accounts, repatriable demat accounts, and non-repatriable demat accounts.
Regular demat account
A regular demat account, simply known as a demat account, is for all residents of India. This is the most common type of demat account available to investors. It stores your purchase of securities in digital form. When you trade in securities using your trading account, they will get credited or debited from your demat account. However, if you are trading in futures and options (derivatives), you don't need a trading account, as these contracts don't need storage.
SEBI has recently introduced a new type of demat account known as basic services demat account to encourage new investors to open a demat account. This account has no maintenance charges if the holding value is below Rs 50,000. If the holding value is between Rs 50,000 and Rs 2 lakhs, the maintenance charges are Rs 100.
Repatriable demat account
Non-resident Indians (NRIs) have the option to invest and trade in Indian securities by opening a repatriable demat account. It allows Indians staying abroad to invest, trade and transfer funds back from India. To have a repatriable demat account, you must have a non-resident ordinary (NRE) bank account.
Once you become an NRI, you must close the regular demat account and transfer the shares to a specific demat account known as the NRE demat account. If you want to repatriate the funds back, a repatriation restriction comes into play. As per this restriction, the maximum funds you can transfer in a calendar year (January – December) is $ 1 million.
Non-repatriable demat account
Non-repatriable demat account is again for NRIs. However, you cannot repatriate the funds abroad once you sell the securities in this demat account. The demat account must be linked to a non-resident ordinary (NRO) account.
Difference between Demat and Trading account
When investing and trading in securities, you must have both demat and trading accounts. Although these accounts have different functions, they are codependent on each other and make trading possible.
Let’s look at the differences between these two accounts.
- Functionality: Demat account helps in storing your investments in digital format. A trading account, on the other hand, helps you buy and sell securities.
- Nature: The demat account shows the securities you own, whereas the trading account shows the transactions you have done.
- Role: The roles of trading and demat accounts are different but interrelated. A trading account helps in purchasing and selling securities. In contrast, a demat account takes the delivery of shares. With a demat account, it is impossible to trade in shares and securities.
Benefits of a Demat Account
Following are the benefits of having a demat account.
- No physical certificates: With a demat account, there is no hassle of storing physical share certificates. Moreover, your investments will not be subject to physical damage as they are stored electronically.
- Easy trading: Since all your investments are stored in one place, tracking and trading them will be easy.
- Variety of instruments: Demat account doesn't just store shares. You can also store mutual funds, exchange-traded funds (ETFs), index funds, and government securities. Hence with a demat account, you can store, track and monitor all your investments in one place.
- Easy access: The securities in your demat account can be accessed anywhere and anytime using your smartphone or laptop. It not only makes your investments accessible but also secure.
- Nomination facility: Demat accounts have a nomination facility. So in case the investor passes away, the nominee will automatically get all the investments, avoiding long procedures and legal disputes.
How to open a demat account online?
Demat accounts are managed by National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL), the two main depositories in India. However, you cannot open a demat account with them. Instead, you must go to a depository participant (DP) to open a demat account.
Steps to open a demat account
You can open a demat account through a depository participant (DP) either online or offline. Below is the step-by-step procedure to open a demat account online.
- Search for a depository participant: So many depository participants offer different services for demat accounts. Choose a depository participant based on the services they offer and the charges they levy for maintaining the account. You can choose depository participants here from this list on NSDL - https://nsdl.co.in/dpsch.php
Some of the common names include Zerodha, UpStox, Groww
- Create an account: Once you select your DP, you must create an account with them by providing all necessary details such as name, date of birth, mobile number, email ID, and PAN card number. You must also provide your bank details so you can get the interest, dividend, and proceeds when you sell your shares.
- Upload documents: Support all the information you gave above by uploading necessary documents such as a photo, PAN card, Aadhar card, etc.
- Verification: Once you upload the documents, you must verify your identity. Since it is completely digitised, record a small video of yourself by reading the given script on the screen and uploading it.
- E-sign: You must digitally sign the documents using your Aadhar-linked mobile number. An OTP will be sent to your phone, and you must enter it to e-sign the application. This method is convenient, secure, and has zero paperwork involved.
- Submit: Once you e-sign, submit the application, and a demat account will be created shortly after that. You will receive the details of your demat on your email ID and phone. The email will also have your login credentials.
Documents required for opening a demat account
SEBI has mandated that any person who wants to open a demat account must have certain documents. Following are documents you will need to open a demat account.
- Passport size photo
- PAN Card
- Proof of identity – PAN Card, Aadhar Card, Passport, Voter ID
- Proof of address – Aadhar Card, utility bills, driving license,
- Bank statement and cancelled cheque
- IT return or pay slip if you want to trade in derivatives
Types of fees and charges associated with opening a Demat Account
To open and maintain a demat account, depository participants charge various fees. The fees vary across stock brokers. Hence it is important to choose the one with low fees. However, along with fees, you must also compare the benefits they offer and choose the one giving the maximum services at a low cost. Following are the charges demat account holders pay in general.
- Account opening fee: It is a one-time fee charged by stock brokers at the time of opening a demat account. Sometimes, the fee is waived to encourage new investors to open a demat account.
- Annual maintenance fee: It is a recurring fee charged by DPs to maintain your demat account. The maintenance fee varies based on the holding value and transactions you make yearly.
- Transaction fee: DPs charge you a transaction fee every time you purchase or sell securities. Some DPs charge you on a monthly basis, while some charge per transaction.
- Demat account safety charges: To ensure your securities are safe in demat form, DPs charge a safety charge. It is levied every month based on International Securities Identification Number (ISIN).
- Pledging fee: It is a fee charged for pledging securities in your demat account.
- Unpledging fee: It is a fee charged to unpledged your pledged securities.
- Dematerialisation fee: A dematerialisation fee is charged when you want to convert your physical shares into the dematerialised format.
How to reduce demat charges?
Demat charges mentioned above are quite normal for any active trader. However, if you aren’t an active trader, you can reduce your demat charges by opening a basic service demat account. This type of demat account has zero maintenance fee. However, the maximum holding limit for availing of the zero-maintenance fee benefit is Rs 2 lakhs.
If you are an active trader, you can reduce your demat charges by opting for discount brokerage plans offered by DPs. Such plans offer a flat fee for brokerage services or have reduced transaction fees. Hence active traders can save a lot by opting for such plans.
Link Bank account to Demat account
To trade and invest in securities, it is important to link your demat account with your bank account. Most of the time, banks offer a three-in-one account which has demat, trading and bank account linked together. However, sometimes, many investors end up taking a demat and trading account from a depository participant due to low expenses and convenience. In such cases, linking your bank account with your demat and trading account is necessary. Below are some of the ways to link your bank account with your demat account.
- Through a payment gateway: You can add funds through a payment gateway offered by banks. You can use either a debit card or a net banking facility to do so. Some banks charge a nominal fee for using their payment gateway. Hence consider these charges before opting for this method.
- Through NEFT/RTGS: To add funds to your demat and trading account through NEFT or RTGS, you must add your demat account as a beneficiary in your net banking portal. After the beneficiary gets added, you can transfer funds whenever you need.
- Through UPI: UPI is the most convenient way to add money to your demat and trading account. All you have to do is select UPI while adding funds to your demat account. The funds are reflected almost immediately in your demat or trading account.
How to invest in mutual funds without a demat account?
No, you don’t require a demat account to invest in mutual funds. Below are some of the ways you can invest in mutual funds without a demat account.
- Through asset management company (AMC): You can invest in mutual funds directly through a fund house or asset management company. AMCs have their own websites, or you can also visit a branch personally. If you invest directly through this method, you can only invest in the funds of that AMC. Moreover, there won't be any periodic portfolio review, and you won't be able to track all your mutual funds in one place if you invest.
- Offline distributors: There are many offline distributors who help you invest in mutual funds. They suggest funds as per your goals and do all your paperwork. However, you won't be able to track your funds in real-time as you have to rely on these distributors. Hence it is better to invest online through mutual fund platforms.
- Online platforms: There are many online platforms that offer direct and regular mutual funds. They also suggest funds from different fund houses based on your goal and investment horizon. Moreover, these platforms do periodic portfolio reviews ensuring your portfolio is progressing towards your goal.
Demat accounts for minors
A demat account can be opened in the name of minors. However, the account will be operated by a guardian until the minor attains majority. The guardian can be a father, mother, or any person appointed by the court.
Free demat account with no annual charges
Many depository participants offer free demat accounts with no annual charges. Moreover, they also waive account opening charges to encourage aspiring investors. However, they do charge a brokerage fee which is fixed regardless of the trade value.
Frequently Asked Questions
1. Do you need a demat account to invest in mutual funds?
No, you don’t need a demat account to invest in mutual funds. You can invest through the fund house, offline distributors, or online mutual fund platforms.
2. Can you open two demat accounts?
Yes, you can open multiple demat accounts with different depository participants, provided you have a valid PAN card.
3. Can we open a demat account for minors?
Yes, minors can have a demat account. However, it has to be operated by a guardian until the minor attains majority. The guardian can be the father, mother, or any person appointed by the court.
4. Like a bank account, does one need to maintain a ‘minimum balance’ in a Demat Account?
No, a demat account doesn't have a minimum balance requirement like a savings bank account.
5. Should I link my bank account to my demat account?
Yes, you have to link your bank account to your demat account. There are several benefits, such as getting dividends, interest, and refunds in case of an IPO application.
6. What is the full form of the 'Demat' account?
Demat is the short form of dematerialisation account. After SEBI introduced a demat account in 1996, physical shares were converted into digital format. The process of conversion is known as the dematerialisation.
7. Are demat accounts safe?
Demat accounts are very safe. They are managed by National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL), the two main depositories in India.
8. How many days does it take for a demat account to be functional?
Once you submit your application, the demat account will be functional in two to four working days.
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