Introduction of the dematerialisation system in 1990s was one of the biggest reforms in Indian capital market history.
Let’s look at the advantages and disadvantages of a Demat account!
7 advantages of a Demat account
- Security and safety – No more loss or theft of shares
- When financial assets were held in the physical format, there was always a risk of loss of share certificates or even theft. An investor who would have been a victim of theft or would have lost certificates, would have to go through a ton of paperwork and challenges to be able to try and recover those assets. And yet there would be no guarantee of recovery. Holding shares in a Demat form is far more safer and secure. Also there is negligible chance of theft or loss of assets.
- Faster and smoother settlements
- In the days of physical settlements, settlements used to take several days due to the movement of paperwork involved. Now due to the Demat system, the processing time for settlements has reduced to 2 working days saving a lot of time, effort and energy for investors! And as they say, time is money!
- Reduction in errors
- In the world of physical and offline settlements, due to extent of manual work involved, there were a lot of manual errors as well. These were often referred to as “Vanda” trades or error trades. One of the biggest advantages of a Demat account is that these erroneous trades have been significantly reduced.
- Easy Transmission
- In the unfortunate event of the death of a Demat account holder, the ownership of assets held in the Demat form can be quickly transmitted to the next of kin. This is possible in 2 ways, one – by holding a joint account or two – by adding the next of kin as a nominee to the account. This was not possible in a physical offline mode since the legal heirs would need to go through too much effort to claim rights on the financial assets of the deceased account holder.
- Simplified Accounting and management
- When financial assets are held in a Demat form, all transactions get auto accounted for by the depository participant. This makes reconciliation and management of accounts extremely simple.
- Better liquidity and monetisation
- When you hold assets in a Demat form instead of a physical form, they can be liquated much quicker. Also you can get alternate forms of liquidity like loans against shares, loans against mutual funds, etc if your holding these financial assets in a Demat form. The same would not be possible in case of assets being in a non Demat physical form.
- Yields and returns v/s physical assets – E.g. gold
- In recent times, a lot of options have emerged allowing investors to hold physical assets in a dematerialised form. For E.g. The Government of India has recently issued Sovereign Gold Bonds which effectively give exposure to Gold to investors but with an additional return of 2.5%. This works wonderfully in favour of investors as they get the twin benefit of exposure to Gold as well as 2.5% interest which is otherwise not received by holding gold as an asset in a physical format.
Disadvantages of a Demat account
- Costs associated with a Demat account
- the only disadvantage of a Demat account is the cost associated with operating a Demat account. While these Demat account charges are a miniscule amount and dwarf in comparison to the advantages of holding assets in a Demat form, they are still costs to be incurred at the end of the day.
Converting physical assets to Demat form
- As discussed above, investors can now also hold quasi gold in a Demat form by buying Sovereign Gold Bonds issued by the government of India. You can buy these bonds as they either periodically issued by the government or you could buy them via a secondary transaction on the StockNote app - India’s Best Mobile Trading app.
- Physical Share Certificates
- In case you hold physical share certificates of companies, you can take benefit of the advantages of a Demat account by converting these shares into a Demat form. Check out the detailed steps for converting physical shares into a Demat form.
- Mutual Funds
- Historically, it has been a practice to hold MF units in a physical form with RTAs (Registrars and Transfer Agents). Even now, more than 80% - 90% of units are held in a physical form which means that investors can’t benefit from the advantages of a Demat account. Samco is one of the few platforms that allows investors to hold units in a Demat form as well. You can select your recommended mode of holding mutual funds as Demat mode or non Demat mode. In case you would like to convert to your existing physical holdings to Dematerialised form, you’d have to submit to dematerialisation form for the same.