DEMAT is an acronym for dematerialization, which is an electronic account that digitally stores all your securities, such as mutual funds, shares, and bonds, in a secure format. Think of it as a bank account or a safe locker which, instead of holding cash, holds securities.
But,
How were the securities traded before DEMAT?
DEMAT was introduced in 1996 in India, before which all securities were held in physical form, such as documents and certificates. Imagine having to stockpile all your investments in paper format, organize them, store them safely, and maintain and present them for verification at the time of sale.
What a hassle!
There was always the prospect of theft, misplacement, damages in the form of tears, water/fire hazards, and so on.
Fortunately, we have DEMAT to thank, as the whole process is streamlined and hassle-free thanks to digitalization. All your securities are stored safely in the servers and any movement in or out of the DEMAT account is also done digitally, ‘paper-free.’
DEMAT accounts can be accessed from anywhere, anytime, on phones and laptops with an internet connection. With three-factor authentication, username, and password protection, you can easily and safely monitor the performance of your securities. When you buy or sell securities, your DEMAT account is debited or credited accordingly. Trades are settled electronically, eliminating the need for physical certificates and making the trading process faster, cheaper, and more convenient.
So,
How to open a DEMAT account?
To open a DEMAT account, you need to register yourself under a depository. Depositories are institutions that maintain DEMAT accounts. They are the repository of investors’ securities. The two main depositories in India are
- NSDL - National Securities Depository Limited.
- CDSL - Central Depository Services Limited.
These are the only SEBI-registered institutions, authorised to provide and maintain DEMAT accounts. The depositories are linked with the investors through DP (Depository Participants). Generally, DPs are stockbrokers, banks, firms, or other financial institutions. One thing to keep in mind is that you can only open a DEMAT account through a DP who is registered under either NSDL or CDSL.
You have to be familiar with mutual funds by now. To be clear, though, these are professionally managed pooled investments. They come in various types, such as equity, debt, balanced, and sector-specific funds. Mutual funds offer diversification and professional management, making them suitable investment vehicles for beginners.
To answer the question,
Do you need a DEMAT account to invest in mutual funds?
The answer is NO. You are free to invest in Mutual funds without a DEMAT account. However, it’s advisable to open a DEMAT account to invest in mutual funds. It’s like when you own a sports car and an old luggage van and when you’re invited to a race, you choose to drive the old luggage van. I mean, you could, but why make it harder for yourself?
If you want to invest without a DEMAT account, you can do so through
- AMCs- Asset Management Companies
- Offline brokers
- Online brokers
But why would you?
Having a DEMAT account is beneficial because, apart from mutual funds, all your other investments and securities will be under one roof.
- A DEMAT account acts as a gateway to all your investments, mutual funds included. It removes the hassle of finding, tracking, and managing different mutual funds on different sites. This also helps you make better investment decisions.
- DEMAT account facilitates fast and seamless transactions, which is convenient. Additionally, they are all digital and there is no paperwork involved. Having them stored online means you can access your funds at any time and make necessary adjustments whenever you deem fit.
- The DEMAT account offers security. All your investments are securely stored in digital format. Storing your documents in this account eliminates the risk of losing them physically or having them damaged. It also minimises the chance of theft or scams since you won't have to carry the originals around.
You may also check our recently published blog, to find out more about how to reactivate your dormant Demat account online.
Having a DEMAT account, although not mandatory, nevertheless makes mutual funds and other investments easy to access, handle, and manage. Ultimately, it is up to the investor to choose the way they invest but having a DEMAT account is always recommended and convenient. With that, we have come to the actual end of this article. And as always,
Happy investing through a DEMAT account!
