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Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

The real cost of opening a demat account

Though the account may be offered for free to customers initially, there are charges levied later

Kochi-based Solvin Tom, a 29-year old quality analyst working for Wave Online Infoway Pvt. Ltd, has two demat accounts from different banks. “I opened the first one in 2012 which I use for trading. This year, I opened another one as it was offered for free," said Tom. He usually trades with the account that he opened first.

“There has been an increase in the number of demat accounts due to the euphoria of a new government, macroeconomic indicators and markets touching 30,000," said Srikanth Meenakshi, co-founder and chief operations officer, FundsIndia.com.

A demat account is required to hold shares in an electronic format and is similar to a bank account. It can also be used to hold financial instruments such as mutual funds, bonds, exchange-traded funds and non-convertible debentures. There are various channels to open a demat account and each comes with costs attached. Some offer a trading account with the demat account while others ask to open a separate trading account at a cost. However, one does not need to have multiple demat accounts. If you also have been offered a “free" demat account, here’s what you should know.

Opening an account

If you plan to invest in stocks directly, you need to open a demat account to hold shares in dematerialized form. To open the account, you need to approach a depository participant (DP). The two biggest depositories in India, National Securities Depository Ltd (NSDL) and Central Depository Services Ltd (CDSL), have authorized several DPs to open demat accounts. According to NSDL website, it has 12.7 million investor accounts.

DPs can either be banks, stock brokers, discounted brokers or online investment platforms. To open a demat account through any of these channels, you will have to fill an account opening form and a client relationship form. You will have to paste a photograph on the form and sign across it. You may be asked to fill a nomination form. This is optional and is applicable only for individual accounts. For know-your-customer requirements, you will have to provide an identity proof which can be your Permanent Account Number (PAN) card, valid passport, voter identity card, driving licence, photo debit/credit card issued by banks, college identity card which will be valid till the applicant is a student, identity card or document issued by a recognized body. For address proof, you can provide voter identity card, utility bills, passport or driving licence.

Usually a representative from a DP’s office comes to collect documents. Once you provide the relevant documents and the filled forms, your account gets activated. “If you have provided complete details and documents as required by NSDL, your account will be opened within 3-7 working days. The time taken varies across channels," said Meenakshi.

And as mentioned earlier, you do not need multiple accounts. “There is no need for multiple demat accounts with different companies or banks as almost all of them will give you similar features," said Vishal Gulecha, head-equity products, ICICI Securities Ltd.

The cost

Before opening an account, you should check and compare the various costs attached. Some DPs will open an account for free. But there are other charges that may be levied later. Broadly, there are basic service accounts and full-service accounts. “The basic service account is an initiative by Sebi (Securities and Exchange Board of India) to encourage financial inclusion. Someone who just wants to get a sense of the market, can use this account. For transactions up to 50,000, you don’t have to pay any annual maintenance cost (AMC)," said Gulecha.

A full-service account will have features including advisory depending on the kind of account. To get a perspective, let’s compare cost across channels of a full service account.

Banks: Most banks allow you to open a demat account free of cost. However, they charge an AMC. Some banks waive the first year AMC and from the second year it charges on the basis of number of transactions.

For instance, HDFC Bank Ltd charges 750 per annum for less than 10 transactions, 500 for 11 to 25 transactions and 300 for more than 25 transactions, according to the bank’s website. Axis Bank Ltd charges 650 plus service charge for up to 10 transactions, 475 if there between 10 and 24 transactions and 275 if there are more than 24 transactions, as per the bank’s website. Bank also mentions on its website that it 2,500 per year for customers whose demat account is not linked to Axis Bank savings account.

TYpically for debit transactions banks charge 0.04% of the value of the transaction or a minimum of 20-40.

Stock broking companies: You can also open a demat account directly with a stock broking company. Here again the AMC varies. The account opening cost can range from nil to 250. They also charge an AMC of around 600 per annum. Some charge 750 for opening a demat account. “The AMC for a demat account is 400. Basic cost of trading account opening is 750 inclusive of taxes. If the client generates brokerage of more than 750 within three months, then brokerage reversal is done making the account opening cost zero," said Dhiraj Padyath, head of online trading at IIFL Holdings Ltd.

For trading, the brokerage is in the range of 0.05%-0.50% of the securities value per transaction.

Discount brokers: Discount brokers don’t provide financial advice and allow you to invest online at a lower cost than traditional broking companies. Some open an online account for free across segments. However, usually the fee for online account opening is 150-250. For demat account you may have to pay 210 and AMC of 400. “The cost for per order trade is 20 plus service tax (on any segment) with no fixed monthly fees having five free trades for a month. There are fixed fee options tool," said Raghu Kumar, co-founder of RKSV Securities, a discount brokerage firm.

You may also have to pay 110 for e-stamping of power of attorney which is part of the demat account opening process.

Online investment platform: You can also open a demat account with investment portals. The AMCs are lower compared with a bank. For instance, the AMC charged by FundsIndia.com is zero for the first year and 200 for any number of trades from the second year. The brokerage is 30 paise per 100 for delivery and 3 paise per 100 for intraday.

Other charges

Other charges include demat charges, remat charges, credit charges, failed or rejected instruction charges, pledge service charges and mailing charges for non-periodic statements. All the charges again vary across channels depending on your usage. A demat charge is the cost to convert physical shares to demat form and can cost 5 per certificate. Re-materialization of stocks can cost 20-30 per request. Debit transaction can cost 0.03-0.04% of the value of transaction, which is usually capped at a certain limit.

“There are statutory charges which are charged by the exchanges and government. Statutory charges include STT (securities transaction tax), turnover charges, service tax, stamp duty and Sebi turnover fees," said Kumar.

What should you do?

You don’t have to open a trading account with the same institution where you have your demat account. Hence, ask for all the costs before opening a demat account and whether you will be charged separately for demat and trading accounts. “If you are interested in investing and holding shares for the long term and don’t plan to transact often, look at a cost effective model that doesn’t charge you per transaction," said Suresh Sadagoppan, a Mumbai-based financial planner.

Furthermore, do compare the overall charges according to your frequency of trading before opening a demat account.

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