What is a Demat account?
Our world is increasingly shifting online. This applies to trading as well. The disruption caused by Covid-19 in particular, gave a major push to the digital initiative, leading to a surge in the number of retail investors who are looking for different avenues in the market to invest their excess funds. As per the data from two depositories of India, NSDL and CDSL, active investor accounts number has seen a rise of 10.4 million in 2020 only.
One of the easiest and safest ways out there to organise, keep an eye on, and manage day-to-day trading activity is a Demat account.
A Demat account can be opened through Depository Participant (DP) which are entities such as a stockbroker, banks, etc., and are intermediaries between an investor and the Depositories (NSDL and CDSL). In simple words, a DP is an agent of the depository which in most cases are stockbrokers.
There are two depositories in India namely, National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). Depositories are institutions whose primary tasks include maintaining the Demat accounts of investors and hold their securities in dematerialised form.
Process of Dematerialisation
Dematerialisation is a process of converting physical securities such as shares, bonds, debt instruments, etc. into an electronic format. Before 1996, all these securities were held in the form of a paper, the process of dematerialisation was introduced to eliminate the issues related to shares in a paper form. In addition, it facilitates quick buying and selling.
Can I have multiple Demat accounts?
Yes, an investor can have multiple Demat accounts, It is as legal as having multiple bank accounts. PAN card works as a unique identifier here and it is mandatory to link PAN card as per the regulations laid out by the regulatory body such as the Securities and Exchanges Board of India (SEBI).
Although an investor can have multiple Demat accounts in their name, it is to be noted that they can not open multiple accounts with the same Depository Participant. To open and maintain multiple Demat accounts, one has to do it with different Depository Participants.
Benefits and drawbacks of multiple Demat accounts
Various questions surround someone who has just started their trading journey and one of the major concerns is whether one should go for multiple Demat accounts or not.
Listed below are some of the pros and cons of opening multiple Demat accounts which might help you make an informed decision.
PROS
Easy to manage
It becomes much easier to manage and organise various types of shareholdings when you have multiple Demat accounts. This helps in sorting, classifying plus efficiently managing different types of investments, be it long-term stocks or short-term investments. For instance, a trader can choose to invest frequently traded stocks with a discount broker while keeping long-term investments with a full-service broker.
Best of Both worlds
Both worlds here imply a full-service stockbroker and a discount broker. A lot of traders prefer to keep the parallel trading accounts with both types of brokers because it gives them access to a variety of interfaces as well as the added services provided by a full-service broker.
Safety and security
Going digital means securities are stored in electronic format which makes it much safer and puts an end to the hassles associated while dealing with physical trading.
CONS
Added Cost of AMC
There are no charges involved while opening a Demat account with most of the depository participants. Annual Maintenance Charge is involved with every Demat account, that is an investor has to pay their DP on yearly basis. In addition to the AMC fee, which varies depending upon the DP, there are other transactional fees that are charged by DPs. More the number of accounts mean more you have to shell out in order to maintain the accounts.
Time availability
Toggling between multiple accounts can be both time-consuming and mentally exhausting. To make an informed decision regarding investments one has to be constantly active and keep a track of the multiple updates, which at times gets laborious and requires commitment in the form of time. Traders with lack of time commitment find it a bit difficult to manage multiple accounts.
Unused accounts issue
Managing multiple accounts can be a bit inconvenient and if a Demat account is left idle for a long time, a DP might freeze the account.
Bottom line:
In the end, it is a personal choice to go for multiple Demat accounts. Although the choice arises from the need of an investor, a few factors that can help in making an informed decision are, experience and know-how of the trader, how much time a trader is willing to commit required to maintain these accounts and to be able to keep track of the constant updates.
If you have just started trading, it is advisable to understand the benefits and drawbacks before going ahead with the decision of opening multiple Demat accounts. For an experienced investor who knows how to make the most out of multiple Demat accounts, it can be a good tactical move and can be beneficial in expanding your investment portfolio.