The goal was to create a deliberate “friction” between the two. He realized that this was a way to prevent the temptation of “trading” his investments. If he wanted to sell any of his long-term holdings, it wasn’t a simple click of a button. He had to manually fill out delivery instruction slips and send them to his broker to transfer the shares before he could sell them.
This small inconvenience served as a powerful “behavioral hack” against impulse selling, noted Kamath. Unsurprisingly, he noted that the best returns came from the stocks he held the longest in his secondary account.
Beyond the behavioral benefits, this strategy also has a significant advantage for taxation. In India, when an investor holds both short-term and long-term stocks in a single demat account, the tax department applies the First In, First Out rule. This means the first shares purchased are considered the first ones sold, which can complicate tax calculations. By segregating long-term holdings into a secondary account, investors can ensure that FIFO rules are applied separately to each account, making tax filing more straightforward.
Recognising the value of this approach, Zerodha has now launched the option for clients to open a secondary demat account. This allows them to easily separate their long-term and short-term holdings, giving them better control over their investing habits and tax implications.
