5 MinsFeb 11, 2021
If you, like many others, think that a Trading-cum-Demat account can be used only for stock market trading, you are wrong. It can be used not just to transact in stocks or shares (including Initial Public Offerings), but also to invest in Exchange Traded Funds, Mutual Funds, Commodities, certain tax-saving investments and also hedge your portfolio with Derivatives, Bonds and Non-Convertible Debentures.
Exchange-Traded Funds (ETFs)
An ETF is a passively managed mutual fund scheme that is traded on the stock exchange and benchmarks its performance to the respective index. The price of an ETF changes on a real-time basis during the trading hours of the exchange. You can enter or exit the ETF at any time during the trading hours. However, to execute a trade (buy or sell) on the exchange, a counter party needs to be available.
ETFs are available for pre-specified equity indices (Nifty, CPSE Bank Nifty, CNX 100, etc.) and also those which mirror the price of gold. It is one of low-cost investment option in the gamut of mutual funds.
Say if you wish to invest in gold without the risk of theft or storage cost, you may invest in gold ETFs, which track the price of gold. Through the Trading account, you may purchase these ETFs and the units will be credited in the Demat account. Each unit in a gold ETF represents ownership of the gold asset and the unit of gold ETF allotted in the Demat account is equal to 1 gram of gold. The physical gold is held by the appointed custodian by the fund house for the gold ETF.
Equity derivatives are financial instruments that derive their value based on the movement of the underlying asset, which could be an index or a stock.
To hedge your equity portfolio, the Trading-cum-Demat account may also be used to take exposure to equity derivative contracts (stock and/or index future and options) by devising sensible trading strategies after getting a sense of the price movement of stock and/or the index. It is advisable to invest in derivatives only if you understand them well.
Bonds / Non-Convertible Debentures
If you are looking for regular fixed returns in the form of interest, or if you want to address your cash-flow or liquidity needs, you could consider investing in fixed-income investment instruments, such as bonds and Non-Convertible Debentures among others. This too is possible through a Demat Account. Preferably choose the best-rated ones in the interest of your financial well-being. Avoid taking undue risk by choosing low-rate debt instruments.
[Also Read: 9 Benefits of having a Demat Account Axis Bank]
Diversification is the key tenet of investing. Usually, commodities move in opposite directions to stocks, thereby providing an excellent opportunity to diversify. One way to invest in commodities is by participating in various commodity Futures and Options (F&O) through a Trading-cum-Demat Account.
By placing an order on the commodities exchanges (NCDEX, ICEX, MCX, etc.), which have electronic trading and settlement systems and a national presence, you can trade in: agricultural commodities, crude oil, oil seeds, base metals (viz., copper, aluminium, zinc, tin, etc) and bullion (platinum, gold and silver). The Forward Markets Commission (FMC) regulates the commodity market in India.
Tax-saving Investment Avenues
To save money legitimately from tax, engaging in prudent tax planning (preferably since the beginning of the financial year) is essential. Axis Direct’s online Tax Savings Solutions helps to reduce your tax burden and at the same time, aim to grow your money through equity investments.
Say, you are risk-taker and want to make investments in a market-linked avenues; a certain sum may be deployed in an Equity Linked Savings Scheme (ELSS), which is subject to a lock-in period of three years. The amount invested will be eligible for a deduction up to Rs 1.50 lakh per annum under Section 80/C of the Income Tax Act, 1961 and the units can be held in your Demat account. However, you can also invest in ELSS funds without a Demat account.
Similarly, a Demat account is not mandatory to invest in mutual funds, but you can hold the units you purchase in your Demat account. This way you can view and keep track of your units easily as they will be available at one place.
Mutual funds offer portfolio diversification, ease of investing and redeeming, transparency in management, and are regulated, making it suitable for retail investors. It is an easy route for anyone who may not know much about equities, to get exposure to the asset class, which is essential for long-term wealth creation.
You must choose a scheme thoughtfully considering your risk appetite, investment objective, the financial goals you are addressing, and investment time horizon to achieve the envisioned financial goals.
If you are worried about market volatility, you could consider Systematic Investment Plans (SIPs) in mutual funds. The inherent rupee-cost averaging feature of SIPs would enable mitigating the risk involved.
It is better to open a Trading-cum-Demat account preferably with a full-service broking firm and link it with a savings bank account.
If you are looking for more than just an ordinary Trading cum-Demat account, such as an all-inclusive platform that allows you to do much more than stock trading and adds value, consider opening the Axis Direct 3-in-1 Investment account.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision