Spend, Save and Invest Smartly
Most of the retail investors in India blindly jump into the stock markets without weighing the pros and cons of doing so. While investing in the stock markets is per se not bad blindly buying and selling of stocks without proper research or a sound understanding of them or the markets is akin to gambling. Many of the retail investors in India buy and sell shares on impulse and badly burn their fingers. Some brave individuals are known to indulge in futures trading where they lose their lifetime savings in a matter of weeks. They come to the conclusion that stock markets are the greatest evil on earth , which they are if investing is not done in a proper manner. Fear and panic selling lead to huge losses and can wipe away ones portfolio. Along with sound knowledge and research of the market a calm demeanour as well as nerves of steel is a must while investing in the stock market. For those who do not possess these attributes investing in a systematic investment plan of a mutual fund or even purchasing defensive shares such as pharma stocks which are known to hold their own even in a volatile market is a must. Above all this staying invested in the equity markets for the long term preferably a three year time horizon is a must. Besides all this excitement and loss of money there is a small expense which is neglected by retail investors in the stock markets. A popular saying a small hole can sink a large ship is conveniently neglected in all this excitement. One conveniently forgets the maintenance costs of the demat account .If ones investments in the stock market are a few thousands is it worthwhile paying an annual maintenance charge of INR 350-500 which could go as high as INR 700 on the demat account. For many retail investors in India the annual maintenance costs on the demat account can be as high as 2-3% of the invested amount. Is this expense ignorable?
If one is a retail investor with a small holding in the stock market he lands up paying a huge amount for the annual maintenance of the demat account for services he may not use but has to pay for anyway. This might not be in ones best interests. In order to protect the interest of retail investors with small holdings the market regulator SEBI has asked all the depository participants to provide basic services demat account to encourage investments in the stock market. A basic demat account provides one limited number of services at a reduced cost whereby he doesn’t have to pay for services he might not need and use. If one has holdings up to INR 50000 then he need not pay any annual maintenance charges .This is in sharp contrast to a non basic demat account which charges INR 350 –INR 600 by the depository participant mainly banks and brokerages as an annual maintenance charge irrespective of the size of the holding. This charge is constant irrespective of whether ones investment is a couple of thousands or several thousands. A zero charge on annual maintenance in a basic services demat account for an amount up to INR 50000 is a huge bonus if one is a retail investor with a small holding in the stock market. If one has a holding in the stock markets between INR 50001 to INR 200000 a fee of INR 100 is charged as asset management charges or AMC charges. One can hold mutual funds and other securities besides stocks in these accounts. These accounts were introduced on October 1st 2012.The depository participants determine the value of the holding or the securities in the portfolio based on the net asset value in case of a mutual fund or the daily closing price of the security .In case of breach of the slab mainly value of the holdings exceed INR 2 Lakhs the depository participant charges one at the same rate as a non basic services demat account.
If one starts his investments in the stock markets with an investment of INR 20000 then no annual maintenance fee is charged. If during the course of ones investments the value of his holdings breach the limit of INR 50000 he is charged as annual maintenance fee of INR 100.If in the subsequent years one continues to invest and the value of his holding crosses INR 2 Lakhs then he no longer avails the lower annual maintenance charge and is billed at the rate of a non basic services demat account.
One is allowed to open only a single basic services demat account with a depository participant. Many a time investors attempt to open more than one basic services demat account with different depository participants within the set INR 2 Lakh limit in order to profit from lower annual maintenance charges .If found out one would have to pay the full annual maintenance charge in line with the non basic services demat account. Besides one has to furnish the PAN card details when one opens the account which makes it very difficult to open more than a single basic services demat account.
I would like to end this article stating that the basic services demat account has the potential to be a game changer with new investors being lured into the stock markets. A popular saying comes to mind “don’t look a gift horse in the mouth” which basically means when offered a gift don’t question it. A large number of retail investors in India come within the purview of the basic services demat account where the value of the holdings or securities needs to be within a couple of lakhs in order to benefit from low annual maintenance charges and unnecessarily pay a higher fee. If one is still paying a high annual maintenance fees even though he is eligible for a basic services demat account then it is in his best interest to take up this account and profit from the lower charges.