A Demat (dematerialised) account allows investors to hold financial securities like stocks, bonds, mutual funds, and exchange-traded funds (ETFs) in electronic format. Opening a demat account is an essential first step for anyone looking to actively trade in the stock markets. Read on to understand why now is the best time to open one, especially for young investors, and the key features of demat accounts.
What is a Demat account?
A Demat account electronically stores your share certificates, converting your physical certificates into electronic shares. Just like we hold money in bank accounts, a demat account holds your stocks, mutual funds, and other investments in electronic format. Leading depository institutions like NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited) offer Demat account services in India.
Why open a Demat account now?
For young investors starting their investment journey, now is the ideal time to open Demat account for several reasons.
- Early start means higher returns: The earlier you start investing, the more time your investments have to potentially grow via the power of compounding. Opening a demat account in your 20s allows decades of equity investment and wealth creation.
- Low brokerage charges: Many leading brokers offer low brokerage and zero account opening charges for young investors below 30 years. This reduces costs.
- Digital convenience: The process of opening a demat account is now almost entirely digital, convenient, and quick. You can complete KYC online and electronically sign documents.
- Increasing range of investment options: From stocks, IPOs and mutual funds to sovereign gold bonds, and more – the universe of electronically tradable investments continues to expand in India. A Demat account allows you to access this wide range.
In short, the convenience, low costs, and investing flexibility offered by demat accounts make now the ideal time for young investors to enter the markets.
Key features of demat accounts
- Secure: Depository institutions use encryption and secure frameworks to protect investor assets. Two-factor authentication enhances security.
- Convenient: Check portfolio, and buy/sell easily via trading and investing platforms/apps, no physical certificate handling is needed.
- Transparent: Get real-time SMS/email alerts for transactions, holdings, and statements. Easy to track portfolio or something as nuanced as IRFC share price.
- Low cost: Annual maintenance charges are low, especially for regular investors. Brokerage costs have also been reduced significantly.
- Flexible: Open individual or joint accounts, or trustee accounts for minors. The nomination facility allows seamless inheritance transfer.
- Tax-efficient: No stamp duty on electronic share transfer. Capital gains taxes optimized in long-term holdings.
Can you trade or invest without a Demat account?
For active trading and investment in shares, IPOs, bonds, ETFs and other securities, having a demat account is mandatory. Without a demat account, you cannot buy or sell securities on the stock exchanges. However, some fixed-income options like bank FDs, savings schemes, and insurance plans can be invested in without needing a demat account. But for accessing growth-oriented securities markets, opening a demat account is a prerequisite.
Is a Demat account needed for IPOs?
Yes, having a demat account is mandatory if you wish to apply for share allotments in Initial Public Offerings (IPOs). When new companies list on the stock exchange via IPOs, shares get credited to the applicant’s demat account if allotted. IPO applications without demat account details are considered incomplete and liable to be rejected. Demat accounts allow easy, digital participation in promising IPOs.
Is a Demat account needed for mutual fund investments?
For mutual fund investments, a Demat account is not compulsory. You can invest in mutual funds without needing a demat account. The mutual fund units are held in your name in the respective fund house’s records. However, having a demat account allows you to hold mutual funds in the electronic demat form as well, giving you one consolidated portfolio view. However, this facility is optional and not mandatory for mutual fund investors.
Is a Demat account the same as a trading account?
Demat accounts facilitate holding investments in electronic format. Trading accounts are meant specifically for buying/selling securities on stock exchanges and require linked demat accounts. The two serve related but distinct purposes.
While a trading account requires a linked demat account, the demat account can exist independently. For example, you can open a demat account for investing in IPOs without needing a trading account. However, trading accounts require a Demat account for the settlement of trades.
Conclusion
For young investors looking for optimal returns over their long investment horizons, now is the ideal time to enter financial markets by opening a demat account. The convenience of online account opening, lower brokerage costs, and the expanding range of electronically tradable securities available make demat accounts very beneficial. Starting the investing journey early with a demat account can help create long-term wealth by harnessing the power of compounding. It’s the first step towards securing one’s financial future.
(This article is part of IndiaDotCom Pvt Lt’s consumer connect initiative, a paid publication programme. IDPL claims no editorial involvement and assumes no responsibility or liability for any errors or omissions in the content of the article.)
