 "2 demat accounts, better returns: Zerodha CEO's 'friction' in investing tip")
Nithin Kamath, chief executive officer of online stockbroker Zerodha, recommends maintaining two separate demat accounts for disciplined investments and tax management.
Kamath said on X that before founding Zerodha he had two accounts: A physical one for long-term holdings and an online account for active trading. The separation wasn’t arbitrary but deliberate “friction” to prevent impulsive decisions.
It made selling long-term investments laborious as using an offline account requires filling out delivery instruction slips and sending them to a broker. The “friction” acted as a behavioural barrier, discouraging hasty selling.
Kamath said the hack yielded good returns from stocks he held the longest. By creating a psychological buffer, he could focus on strategic, long-term investing rather than short-term gains.
Tax benefit
Maintaining two demat accounts offers clear tax benefits as well. If both short- and long-term holdings are in the same account, the tax department applies the so-called First In, First Out (FIFO) rule. The earliest shares purchased are considered sold first, complicating tax calculations.
Segregating long-term investments into a separate account ensures FIFO rules apply independently, simplifying tax filing and helping investors plan capital gains more efficiently. For active traders who also hold long-term positions, this can reduce errors and make annual tax calculations more straightforward.
Takeaways for investors
- Separate accounts for different goals: One for long-term investments, another for active trading.
- Prevent impulse selling: Physical or procedural effort can deter unnecessary trades.
- Simplify taxes: Independent FIFO calculation for long-term and short-term holdings.
Focus on long-term gains: Historical evidence shows stocks held longer often perform better.