A Demat account holds certificates of shares owned by an individual in an electronic or dematerialized format. This makes it easier to buy and sell securities across asset classes, including mutual funds, ETFs and fixed-income investment products. Demat accounts can be opened with a brokerage house or depository participant (DP) in order to store securities and carry out trades.
You can open a Demat account in any bank or brokerage, but while opening an account may not come at a cost, the maintenance of one might. If you intend to be a small investor with the value of your holdings below Rs. 2 Lakhs, you may consider other kinds of Demat accounts. These charge you less than a regular Demat account. Nonetheless, today, most investors invest in a large number of securities in order to diversify portfolios and broaden their financial horizons. Hence, the value of securities held in a Demat account may be higher than Rs. 2 Lakhs. Moreover, once your securities come into profits, the value of your securities may surge, although it was initially low. So that Demat accounts are maintained and administered with security and efficiency, banks and other DPs charge you to keep your Demat account active and well-managed.
Account Maintenance Charge (AMC charges for a Demat account)
Brokerage houses and depository participants (DPs) levy Demat account maintenance charges(AMC) or folio maintenance fees for the services they provide. You should account for the fact that only certain banks and brokerages are authorised to become official DPs by the Securities and Exchange Board of India and permitted to store your securities on behalf of the depositories in an electronic format. This comes at a cost to these DPs. AMCs cost between Rs 300 and Rs 900 and can be paid as a one-time charge or quarterly. Often, for the first year, AMC Demat charges are waived off so that DPs can attract new customers. Often, when a customer opens a Demat account with a bank, it comes bundled with a trading account as well as a bank account. The AMC in such a situation is relatively lower. Conversely, if a Demat account opened with one bank is linked to a savings account in another, the AMC levied would be higher. Some banks and brokerages offer you some of the lowest AMC charges for a Demat account. However, when you are selecting a depository participant, any bank or other finance company, to open a Demat account, you should note what Demat services are offered in the AMC or whether other financial institutions charge a higher ASMC for specific benefits of holding a Demat account with them.
Other types of charges
Along with AMC charges for a demat account, certain other charges may apply to demat accounts in general. Why is it vital for you, the investor, to be aware of these? Investors must know about charges levied while investing, as you don’t want your charges to be so high as to negate your profits from investment. You should also note that if you open a demat account, you have agreed with the terms and conditions about demat account holding with your particular depository participant, and are obligated to pay your charges in full and on time.
1. Opening charges
DPs charge an opening fee each time someone opens a Demat account. Although negligible, opening charges are often subject to special offers to allow for an easy start for new investors. Some DPs may even open a Demat account free of cost. Moreover, brokers may also offer incentives to open two-in-one or three-in-one accounts that integrate Demat accounts with trading and bank accounts. Before Demat accounts were the norm, banks would charge Rs 700 to Rs 900 as an opening fee. Nowadays, the opening of demat accounts is free with most AMCs, banks and brokerages, in a bid to attract new investors and enhance the activity in investment avenues. On the investor’s part, it is important not to get too carried away when you notice that you are being offered a “free” demat account. Nothing comes for free, and you should explore whether other charges apply to your demat account. In many cases, opening a demat account is free but the annual maintenance charges for a demat account may be on the high side.
2. Custodian or safety fee
This fee enables a DP to keep an investor's securities safe in its custody and manage them effectively. These can be charged on a monthly basis, or based on the number of securities held in your account. In fact, such Demat charges can be between Rs 0.5 and Rs 1 per International Securities Identification Number (ISIN). If a one-time payment has already been made, charges for individual ISINs will not be levied.
3. Transaction fee
Transaction fees are charged each time securities held in a Demat account are bought or sold. Often, a DP will charge transaction fees on a monthly basis. These fees, however, can differ based on the type of transaction that may have taken place. Depending on their policy, brokers may either charge a transaction fee only when security is debited or for both debited and credited shares.
Conclusion
Demat accounts have made it incredibly easy and convenient to store and trade shares and other securities. However, brokerages require some funds for Demat account maintenance charges, safekeeping of your securities, and for any transactions, you may authorise. DPS offers a number of ways in which to make these payments. Many brokers may even grant offers or waive some of these Demat charges off. Investors have it easy these days, not in terms of winning big in the stock market (although this is a possibility if you learn to trade well), but in consideration of opening demat accounts linked with versatile trading accounts. Brokerages and asset management companies have sprouted up in the past few years, all trying to cater to the distinctive demands of a range of investors and investment channels.
The price points of any DP are the deciding factors that investors consider while opening a Demat account. This, of course, should not be the only deciding consideration. While charges may be low at some DPs, they may not offer you the best of services. On the other hand, a DP with high charges may provide many advantages, such as free access to certain exchanges from their portals and even ace investment recommendations about IPOs, for example. Others may have offers like waiving the AMC if you complete a certain amount of trades. A thorough investigation must be done on charges of any DP before you decide to opt for a particular Demat account.