2 demat accounts, better returns: Zerodha CEO's 'friction' in investing tip

Nithin Kamath explains hack he used to prevent impulsive trading decisions

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.