Advantages and Disadvantages of Opening Multiple Demat Accounts

1991 witnessed the liberalisation of the Indian economy. Post this, SEBI was established by the Indian Government as the regulator for securities markets in the year 1992. Soon after that, SEBI started bringing reforms in the securities sector. Economic reforms started getting passed to accomplish specific goals, such as the growth of capital and personal inflows, modernisation, and the introduction of a free-market economy. The most significant reform that SEBI carried forward was the dematerialisation of securities.

Note that dematerialisation is the process of converting physical share certificates to electronic book entries. The process resembles the one you experience with bank accounts. The most noteworthy thing about this process is that it eliminates specific issues like massive paperwork, theft/loss of share certificates, risk of bad deliveries, and transit delay. Dematerialisation eliminates these issues and simplifies the work.

The Inception of DEMAT Accounts

According to the 1996 Depositories Act by the Parliament, Dematerialisation has a strong foundation. NSDL or National Securities Depository Limited, led this dematerialisation of securities. The CDSL was established and achieved the position of being the second Depository with SEBI recognition and licence.

As far as this act is concerned, the registered owners of shares in any firm’s record are the Depository. It holds shares in the fiduciary capacity of any shareholder. In addition, depositories have also appointed different intermediaries, referred to as the Depository Participants, that open and maintain each investor’s DEMAT account.

What Do You Mean By A DEMAT Account?

Much like bank accounts, the DEMAT accounts also hold the investments that traders or investors make in shares, bonds, mutual funds, government securities, and exchange-traded funds under one umbrella. When you buy any security, it appears as your credit in this account. On the contrary, when you sell any security from this account, it appears as debits in the DEMAT account.

Depositories hold dematerialised securities, but the interface to operate these securities is a DP or Depository Participant. Now, who is a DP and what’s the purpose? In simple words, the Depository Participant is the Depository’s agent through which the trader/investor maintains or operates the account. The DP intermediates between the Depository and the trader. The service is somewhat similar to the branch service of the bank offering banking solutions. Think of it as the banking services availed through the branch. Similarly, the depository services are also availed through the DP.

Understanding the Pros & Cons of Opening Multiple Demat Accounts

Trading platforms and brokers have witnessed a rise in accounts opened with them resulting from the pandemic and lockdown. The investment world has also witnessed a rise in retail investors growing substantially out of fears of a secure financial future. Due to the risks associated with previous opportunity expenses, these investors look for different ways to invest the money and get a return on the capital. The prime need for accessing this securities market is holding a DEMAT account with the DP. You can find a wide range of discount brokers who can help you with the process of opening a DEMAT account at minimum charges.

Individuals can open a Demat account with more than a single broker. That helps them have multiple accounts under one name. However, they can only open one single account for each DP. According to the rules, a full-service broker or general discount broker may offer advice to trade in securities like ETFs, mutual funds, stocks, bonds, and more. An investor can choose any of these securities depending on the experience level and returns for a specified timeframe.

Nonetheless, there are various reasons why an investor may think of opening multiple DEMAT accounts. However, like other things in life, even opening multiple DEMAT accounts has a positive and negative impact on your decision-making. On that note, let’s present the top pros & cons of opening multiple demat accounts.

Outlining the Benefits of Holding Multiple DEMAT Accounts

Having multiple DEMAT accounts is beneficial depending on the financial goals and needs of the investor. Pointed below are the benefits of multiple demat accounts:

Investment Potentials

Diversification is a crucial aspect of financial strategy. You can divide your investments according to several standards, like time horizons, financial goals, and tolerance for risk, by maintaining numerous DEMAT accounts.

Let’s take an example to elaborate on this advantage. You may have a single account for long-term investments for short-term or speculative trades and another account in stable blue-chip stocks. In such a circumstance, if one of them underperforms, the performance would not drastically impact your investments.

Managing the Risks

Each stock market investment comes with its share of risks and benefits. Once you learn how to diversify your investments around different accounts, you can quickly reduce the risks pertaining to substantial loss, which otherwise would affect the whole portfolio. It benefits you significantly when you are associated with risky investment activities. Take the example of trading in volatile equities or stocks.

Knowledge Gained from One Broker Can Be Used to a Diverse Portfolio

The most notable advantage of the DEMAT account is that you can amass your investment knowledge. On top, you can also implement your gained knowledge from one broker to the broader portfolio. In such cases, you can easily apply your suggestions and advice from the full-service broker and manage other investments. You can do so through a broker who doesn’t offer the same degree of advice for your investments. Besides gaining your stock market insight, you can also reap the benefits of your portfolio.

This way, you can improve your credibility in the investment sector. For instance, suppose you are planning to invest in the IPO. The allotment might not be available to the general users. In such circumstances, the diverse portfolio can be fuelled by different DEMAT accounts and it gives you vaster trading opportunities.

Work with Multiple Brokers Simultaneously

Multiple brokerage firms provide you with a varying range of services, trading platforms, and research tools. Opening multiple accounts, thus, lets you reap the advantages of various brokers. For instance, a broker may offer inexpensive fees, while the other offers comprehensive analysis and research tools. Working with different brokers improves your flexibility in selecting the best broker for a specific type of investment or trade.

Differentiate Your Long-Term and Short-Term Investments

One of the benefits of multiple demat accounts is that it gives you a chance to work with different brokers. In that way, you can easily separate your long-term and short-term investments. For example, you may open a DEMAT account. One broker may offer short-term investment opportunities, while another may charge you lower account maintenance fees for long-term investments.

Downfalls of Opening Multiple DEMAT Accounts

Holding multiple DEMAT accounts has its share of advantages. You have read about the benefits of multiple demat accounts. But there’s no point in neglecting the drawbacks. So, when you intend to open multiple DEMAT accounts with different brokers, ensure you understand these disadvantages before making your decision

Increased Annual Maintenance Fees

The major disadvantage of opening multiple DEMAT accounts is the maintenance fees charged by different brokers for each account annually. Even when the DP lets you open the account free of charge, there will be minimal maintenance charges to protect your Demat account from the backend.

Besides, transaction fees will be charged each time you make the trade. Thus, trading or operating through different Demat accounts needs higher transaction and maintenance fees. Maximum brokers provide you with a free AMC and charge you a minimum fee. The fee is based on each DEMAT account. However, owing different accounts leads to increased AMC charges.

More Time and Attention Required from Your End

Multiple DEMAT accounts require individual attention from the trader or investor’s end. You need to invest your time individually on these accounts. While this might not be so difficult for active investors, operating different accounts for non-active investors sounds like a challenging job.

Keeping with this commitment requires more time. You must have bookkeeping proficiencies to check the annual, quarterly, and monthly statements. So, if you are planning to keep stock market investment a backup plan, opening multiple DEMAT accounts might make things more time-consuming.

Wrapping up

Holding various DEMAT accounts is an excellent strategic move in case you have experience in trading. Multiple DPs offer different pros & cons of opening multiple demat accounts, with which you can maximise your returns.

However, you need to keep track of these accounts and operate them accordingly. So, before you plan to open multiple DEMAT accounts, you need to check out these pros and cons depending on the investment goals, preferences, and risk tolerance.

Consider whether the perks of diversification overshadow the added costs and complexities associated with multiple accounts. With multiple DEMAT accounts, you need to review and reassess your investment strategies and ensure the approach aligns with the financial goals.