Mutual funds are one of the most highly utilized investment instruments by both professional and beginners. Investing in mutual funds is considered one of the safest investment strategies due to the level of diversification offered by it. The option of investing in mutual funds has been made even more accessible with the introduction of 3-in-1 accounts that provide the functions of demat, savings, and trading account. However, opening a demat account is also equally easy and hassle-free.
What Is a Demat Account?
Demat account in its simplest term is an account that is used to hold the securities in dematerialized form. The concept was first introduced in India in 1996 when the physical share certificates of the investors were converted into the electronic form to be stored in the demat account. The demat account holds shares, mutual funds, bonds, exchange-traded funds, and government securities.
Pros of Holding a Demat Account
Demat account provides you with a central place for holding all your investments. NSDL and CSDL are two depositories in India that hold all the demat accounts. The depository participants act as an intermediary that helps you access the central depositories. Banks, brokers, and institutions function as depository participants or commonly referred to as DP. The depository participants also offer facilities to convert your physical instruments into electronic credit in your DP account.
The demat accounts come with a range of added benefits which were otherwise not available in the physical storage of your investment record. Apart from holding all your investments in one place, demat accounts are also updated automatically every time you transact. Demat has made holding investment certificates risk-free as there are no chances of physical damage or loss.
While the overall cost of the transaction has reduced, the security of purchasing mutual funds or any other instruments has increased. With a demat account, there are no chances of fake shares, thefts, or any other malpractices which were previously seen in the usage of paper as a mode of trading and investing. The efforts and documents involved in the opening of a demat account are also comparatively lesser.
Cons of Opening a Demat Account
Demat account holders can be a soft target of internet frauds if they are not tech savvy. Due to lesser technological know how they lean on external parties for assistance that may not be trustworthy.
A demat account comes with a cost since maintenance fees of the broker is variable on a yearly basis. This fees however varies from broker to broker.
If you are a demat account holder you would have to pay the maintenance and other additional charges even if you hold a single share. Many times, investors don’t read the terms and conditions attached to the closure of the account. As a result, they have to clear all dues accompanied by the interest when their account becomes dormant.
The Process of Opening a Demat Account
Step 1) Select a depository participant after carrying out your own due diligence.
Step 2) Once you select a DP, fill an account opening form and submit documents of your identity, residence proof, and passport size photographs.
Step 3) PAN card is mandatory for opening a demat account.
Step 4) Once you submit the documents, you will receive the document containing terms and conditions along with charges of the demat account.
Step 5) An in-person verification is mandatory for opening a demat account. The staff of the DP will verify the documents provided in the application process. It is advisable to keep the original documents handy during the process.
Step 6) Once your application is approved, you will receive your account number and password to access your account online.
While the demat account is not mandatory for investing in mutual funds, investing or trading shares require a demat account. It is recommended you select SEBI registered intermediaries to open your demat account. You can also opt for 2-in-1 accounts which act as both trading and demat account. Since demat account allows you to keep a tab on all your investment at nominal annual charges, it is advisable to open a demat account before you start investing.