- Date : 28/09/2020
- Read: 4 mins
A demat account comes with a host of benefits for you as an investor. Here’s how to open one and what to keep in mind.
A demat or ‘dematerialised’ account is similar to a bank account; the only difference being that a bank account holds your liquid cash while your demat account holds securities – in the form of stocks, mutual funds, bonds, or debentures. A demat account is compulsory if you wish to buy or sell market-traded securities. It is an electronic vault that holds your investments as an alternative to physical certificates.
Advantages of having a demat account
There are quite a few benefits of a demat account when it comes to managing your investments.
Multipurpose vault: As technology advances, in addition to the traditional investments mentioned above, you can also store and access your digital gold and insurance policies.
Safety and security: The assets are held in a digital format, so there is no additional storage cost. The risk of theft, loss of physical documents, or mutilation is eliminated as well.
Rapid transfers: Buying and selling of securities is instantaneous with a demat account. There is no paperwork to be done. Errors of ‘bad deliveries’ or beneficiary details are minimised as well.
No stamp duty: Unlike in the case of physical assets or documents, you do not need to pay additional stamp duty on transfer of electronic assets.
Nomination facility: A demat account gives you the option of having a nominee for your account. In the event of demise of the investor, the assets are easily transferred to the nominee or heir.
Updates: Every time you buy or sell a security, you are alerted via text and email. This minimises chances of fraud or mismanagement. Even if there are no transactions, a demat statement is sent to you periodically so you can assess the performance of your investments.
Related: How to invest in stocks like a pro
How to open a demat account
A demat account is opened via a depository participant (DP) who serves as an intermediary between the investor and the trading platform where the actual purchase or sale of asset happens. There are over 850 DPs registered with either National Securities Depository Ltd (NSDL) or Central Depository Services India Ltd (CDSL), where you can open an account. These include stockbroking firms, commercial banks, and state-operated financial corporations.
Depending on the constitution, many DPs offer a 2-in-1 or 3-in-1 account. A 2-in-1 account is offered by most broking firms and NBFCs, and includes a demat account and trading platform from the service providers. Banks, on the other hand, are able to provide a 3-in-1 account where the bank account, demat account, and trading platform are all linked together, allowing easier fund transfer for trading purposes.
What are the documents required for opening a demat account?
The list of mandatory documents specified by SEBI remains the same across different institutions that offer a demat account:
- Proof of identity – Driving licence/ passport/ Aadhaar card/ voter ID
- Proof of address – Driving licence/ passport/ Aadhaar card/ voter ID/ bank statement
- PAN details
- Passport-size photographs
- Bank account details – cancelled cheque
- Proof of income – copy of ITR acknowledgement (for trading in derivatives segment)
What to keep in mind while opening a demat account
If you are a woman who’s looking to explore the investing world, here are some things you should consider before opening a demat account:
- Type of demat account: As mentioned earlier, you have a choice between a 2-in-1 and 3-in-1 account. Unless you want to keep your investing account separate, there is no reason to open another bank account. Maintaining the account balance and accounting for tax purposes is additional work.
- Type of broking service: The trading platform can be of two types – a full service brokerage or discount brokerage. Depending on your knowledge related to investing and guidance required, you can choose one of the two.
- Charges and fees: Maintenance charges and broking charges play an important role in selecting a service provider. Select one with affordable transacting charges but not at the cost of service quality.
- Trading platform and customer support: The trading platform needs to be user-friendly and glitch-free. Look at the customer reviews and take a software demo before you sign up.
To sum up, conduct due research and compare service quality before you make your choice.