One of the fastest ways of building your corpus is through diversification of investments. From a young age, you need to consider different types of investment instruments that can help you earn higher returns. A recurring or fixed deposit in the bank or post-office cannot help you earn high returns in the long term, so diversification is important. You also need a special account in which you can hold all your share market investments safely and securely. This account is known as a demat account. Here are some essential facts about these accounts that you need to know.
What is demat account?
Short for a dematerialised account, a demat account is a unique account that allows you to hold all your share market instruments – stocks, bonds, mutual funds, money market instruments etc., in dematerialised or electronic format. Earlier, share traders had to procure physical certificates for their share market and mutual fund investments. But with the Securities and Exchange Board of India (SEBI) mandating demat accounts in 1996, investors can now hold all their investments electronically and also conduct trades i.e. purchase and sell share market securities through this account.
Why was demat introduced?
Apart from safely storing your investments in electronic form, demat accounts allow you to conduct trades on your own, without having to pay commissions to a broker or an online trader. As such, you can save a lot of money, especially if you are a regular investor. There is also a level of transparency in transactions that you can get as an investor through this dematerialisation. Moreover, you do not have to worry storing the physical share certificates or bonds or mutual fund documents, which can be torn, tattered or even misplaced or lost.
You need an intermediary for opening the account. Intermediaries are essentially service providers. Banks and investment firms are regarded as demat intermediaries as they provide these accounts in exchange for a fee. You can open an account with any intermediary of your choice. Typically, new and old investors prefer to choose an intermediary whose office is located in close proximity of their home or office. Younger investors, on the other hand are opting to open their account online.
Fees and charges
As mentioned above, banks and investment firms provide demat services. While you do not have to pay them anything in commission fees for your regular investments made, you are required to pay two types of charges to avail the services.
First, you need to pay an account opening fee. This is a one-time fee and it can cost you anything between ₹200 and ₹1200, depending upon the intermediary. You also need to pay an annual account maintenance fee. This fee also varies from one investment firm to the other and you are charged approximately ₹300 to ₹500 as maintenance fees.
Some intermediaries do not charge any account opening fees as a customer acquisition tactic. However, they may charge a higher account maintenance fee.
Final word: It is necessary to know demat account meaning and the types of transactions possible through this account before you open it. This account functions in the same way as your savings bank account in that you can hold, deposit and withdraw securities from it as and when you like. As such, these accounts are highly liquid. Also, demat transactions are safe and secure and intermediaries are obligated to use secure firewalls to ensure your financial information is always protected.