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Learning how to open and operate a Demat account is Investing 101, and it’s essential you know everything about it before you enter the stock exchange. So how does it work?

5 benefits of demat account every Indian investor must know about

In India, if you want to invest in financial instruments such as shares, bonds or mutual funds or carry out any sort of transaction on the stock exchange, you need to have a Dematerialized or a Demat account. With a demat account, investors need not take physical possession of their security documents; instead the financial instruments are held electronically in the demat account. Let’s look at 5 things you must know about a demat account.

1.What is depository?

A depository is an organisation that holds securities shares, debentures, bonds, government securities, mutual fund units etc. in an electronic format. A depository is very similar to a bank. Presently, two depositories -- National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) -- are registered with SEBI. NSDL works for the National Stock Exchange (NSE), whereas CDSL works for the Bombay Stock Exchange (BSE).

2.How to open demat account?

To open a demat account, you should approach a registered Depository Participant (DP). A DP is an institution that serves as an intermediary between the investor and the depository. Commercial banks, stock brokers, state financial corporations among others can register as a DP with SEBI. As of September 30th, 2008, 7111 depository participants were registered with SEBI. You can find this list on the websites of NDSL and CDSL.

3.What are the documents required for demat account?

To open a demat account, you need to submit the following documents to your depository participant.

  • Passport size photographs
  • Proof of Identity (Driving licence/passport/Aadhar card/voter id)
  • Proof of residence (Driving licence/passport/Aadhar card/voter id)
  • Copy of your PAN card

Upon submission of an application form along with these documents, it takes 1-2 weeks to open a demat account.

Related: Financial Planning for Dummies: A 7 Step Guide

4.What are the benefits of a demat account?

  • A safe and convenient method of stories high value securities such as stocks, mutual funds and bonds
  • Instant transfer of securities to the investor
  • Elimination of risks related to physical transfer of documents such as delayed deliveries, fake documents, thefts, etc.
  • Any bonus shares get credited automatically to the demat account without any paperwork
  • No need to change address with all the companies in which you are an investor; any change of address with the DP is communicated to all the companies
  • Hold all types of investments, such as stocks, bonds and mutual funds in a single account

5. What will be the Demat account charges?

The charges of opening a demat account vary according to depository participants. While most DPs charge an account opening fee, certain private banks do not charge any fee for opening a demat account. Apart from account opening charges, there could be few other charges such as an annual maintenance charges (AMC), credit charges, mailing charges for statements, etc. AMC for a demat account ranges from Rs. 200 to Rs. 8502.The amount of AMC can vary by the number of transactions.

To encourage investment in the stock market, SEBI has introduced a Basic Services Demat Account that is a no-frills account with limited services. There is no annual maintenance charge for holding investments up to Rs. 50,0003 in a basic services account.

Related: Are you smarter than your insurance agent? [Quiz]

A demat account is a necessity if you want to reap the benefits of investing in the stock market. Before opening one, do a thorough research of the fees charged by various depository participant and understand the various features offered. If you’re a new investor, a Basic Services Demat Account will be adequate for you.

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