Eliminating the traditional process of exchanging stocks and shares through physical receipts called certificates, the process of Dematerialization of shares was initiated in the year 1996. Physical share certificates were converted to electronic form securities, and an equivalent price and number of shares were credited to the investor’s account.
What is a Demat Account?
A Demat or a Dematerialized account enables individuals to hold shares and securities in an electronic format. While it is possible to invest in mutual funds without having a Demat account, the stocks sold via exchanges need to be compulsorily in Demat format. However, now individuals can invest in mutual funds on exchanges without opening a Demat account, only through a registered advisor or broker. A Demat account is considered useful for investors who have a portfolio of stocks and funds as it shows all the holdings in one place.
Advantages of Demat Account
Demat accounts bring along a wide range of added benefits which are otherwise not available if you have physical storage of your investment records. While having a Demat account is not mandatory for investing in mutual funds, here is why you should still open one for yourself-
- A Demat account acts as a central place for holding all your investments
- Demat accounts are handled by NSDL and CDSL, the two Indian depositories that act as intermediaries holding all the demat accounts in the country, helping you to access the central depositories
- The depository participants offer facilities that convert your physical instruments to electronic credits in your DP (depository participant) account
- NSDL and CDSL provide consolidated account statements (CAS) to all the Demat account holders, consisting of all the transactions and holdings in the Demat account along with the mutual fund transactions held in the statement of account form
- Converting the physical share certificates of the investors to the electronic form, Demat account provides the investment certificates without any risk; eliminating the chances of physical damage, loss, theft, fake shares, etc.
Disadvantages of Demat Account
If you are not aware of how to use a Demat account and/or are not well-versed with the handling of internet, you may come across the following disadvantages of having a Demat account-
- If you are not tech-savvy, you may become an easy target of internet frauds
Since the maintenance fees of the broker is variable, holding a Demat account costs the investors a maintenance fees - Additionally, even if you hold only a single share in your Demat account, you will have to pay the maintenance and other additional charges
- Indian investors are unaware of the fact that DPs charge even on dormant account and hence don’t close their Demat accounts, leading to payment of additional charges
- An investor cannot close a Demat account which has illiquid shares, and will have to go on paying the charges to the participant
It is suggested that you read the terms and conditions attached to the closure of the account in order to avoid paying any charges that you weren’t aware of in the beginning.
Documents Required for Opening a Demat Account
In order to open a Demat account, you must have the following documents-
- PAN Card (mandatory)
- Bank statement (last 3 months)
- Address Proof
- Income Tax Return
- Two colored photos
- Bank cross cheque
- KYC details
- Aadhar Card
Kindly note that you must be KYC compliant in order to be eligible for applying to open a Demat account.
How to Open a Demat Account?
A Demat account can be opened even without any shares at all. In order to open a Demat account, follow the given steps-
- Select a DP (depository participant) with which you wish to open the Demat account and fill the form
Submit the form, post which you will be given a copy of rules and regulations, terms of agreement and the necessary charges that you will incur - An in-person verification will be done wherein a member of the DP staff will contact the account holder in order to verify the details provided in the account opening form
- After completing the verification, the account holder will be given an account number or the client ID. These details can also be checked online
- The account holder will be eligible to pay a monthly maintenance fee for the demat account. The fee covers the account transaction charges and is levied for debiting the securities to and from the account on a monthly basis.
It must be noted that the fee to be paid by the account holder is variable, depending upon the choice of DP, type of transaction (buying or selling), converting the shares into physical form or vice versa.