Should You Invest in Mutual Funds Through Your Demat Account?

Ritika said, "Sure, I will start with SIPs as the first step towards investing. The other day while I was discussing mutual funds with my colleagues, one of them suggested a convenient way to hold mutual funds is by getting a Demat Account opened, which is also offered by the bank where we have salary accounts with. Now I am confused as many online portals and apps allow you to invest in mutual funds directly. Mitali, could you help me understand whether I should invest in mutual funds directly or through Demat Account.?"

To which I responded, "Yes, Ritika, while investing in mutual funds, investors have an option to choose to hold their units in a Statement of Account (SOA) form, or a dematerialised (Demat) account. The units are held in digitised form in both circumstances, and no physical certificates are involved."

A Demat Account is an online account that you can use to hold securities in a 'dematerialised' or digital form. This account is mandatory for investors willing to trade in equity shares. Due to advancement in technology, stock exchanges came up with their platform for Mutual funds' investments as well, so for associated benefits, these depository participants, such as National Securities Depositories Ltd. (NSDL) and Central Depositories Services (India) Ltd. (CDSL). have also started offering transactions in mutual funds, along with other products like NPS, Bonds, corporate FDs, etc. Moreover, it is easy to use and offers you a lot of conveniences. However, it is not mandatory to have a Demat Account to buy Mutual Funds.

While in the case of products other than mutual funds, if you buy in physical form, you need to safeguard the certificates issued against those investments. However, this is not the case with mutual funds. When you purchase mutual funds, you will be allotted units, which will appear on your Statement of Account (SOA). You can generate the mutual fund statement through AMC offices and even from your direct online login if you have, whenever you want. As a result, unlike shares and bond certificates, you do not need to be concerned about the safety of your mutual fund units.

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Many of you may be wondering if a Demat Account is required to invest in Mutual Funds. It is important to know while it is not mandatory to have a Demat Account to buy Mutual Funds, it can help to have one. In the simplest of terms, a Demat Account can be defined as an account used to hold securities in a dematerialised form. This account holds exchange-traded funds, shares, bonds, mutual funds, and government securities. Demat Account does offer some benefits to investors while investing in mutual funds.

Here are the benefits of buying mutual funds in a Demat Account:

Opening a Demat Account for mutual funds is also relatively hassle-free and easier. After deciding on a DP to ensure the best Demat Account for mutual funds, fill out an account opening form and attach all required documents, such as identification proof, passport-size photograph, and residence proof. PAN card and in-person verification are required. After the submission is complete, you will receive a document with terms and conditions as well as charges for the account. The documents given will be verified by the DP staff. To login and open a Demat Account online, you'll need your password and account number, which will be provided by them.

• Demat Account enables you to hold a central place to store all your investments that you own. You get to hold most of your financial investments such as shares, mutual funds, bonds, and sovereign gold bonds in one account, and it makes tracking simple. A consolidated account statement issued by CDSL or NSDL resolves this issue to some extent if you are holding it in the SOA form.

• Apart from keeping all of the investments in one place, these demat accounts also get updated automatically each and every time a transaction is carried out. The depository participants additionally offer facilities for converting the physical instruments to electronic credit within the DP account.

• Transmission of units to the nominee is simpler in Demat form in case of death of the unit holder, the nominee named for the Demat Account gets control of all the investments. If you have units in SOA, you need to submit a transmission request to the Registrar and Transfer Agents (RTAs) of the respective funds.

• Having a demat account is beneficial if/when you want to frequently invest in Exchange Traded Funds (ETFs) because these funds can only be traded on stock exchanges.

• A Demat Account offers better security, and all your information is safely stored. Maintaining certificates of investments has been made risk-free, there is no possibility of a physical loss or damage to important documents, certificates, etc. Moreover, using the account also minimises the chances of falling victim to a theft or a scam.

While the overall transaction cost is decreased, the purchase of mutual funds and other products is now significantly more secure, thanks to demat accounts. There are numerous advantages to having an Online Demat Account that would not be available if investment records were stored in a physical form.

Demat account simplifies the process of transmission of units to nominee in case of accountholder's demise and single statement to view all holdings. However, from a financial planning perspective, there are certain limitations. Many investors do not have a clear awareness about the need for Demat account to make investments in mutual funds. There are many other cost effective mechanisms available that an investor must look at.

Here are certain drawbacks to holding mutual funds in a Demat form:

• You have to pay annual maintenance charges for holding a Demat account, which usually ranges between Rs 250 and Rs 600, besides transaction charges (around 0.05% per transaction). Mutual funds in SOA form do not require any annual fees, it allows you to transact through investor service centres of mutual funds or its RTA.

• For buying and selling mutual fund units in Demat form, one has to pay brokerage to the broker and transaction charges to DP in addition to annual maintenance charges to DP. Only one nomination can be made with a Demat account which may make the process of estate planning complicated. If you wish to distribute your assets with more than one person in varied proportions, it becomes difficult with a Demat account. Other than the restrictions on a nominee, an investment cannot be held jointly if the Demat account is in the name of a single person.

• There is also a restriction on the number of units held in a Demat Account. For instance, if you want to jointly hold some mutual funds with your spouse/children, but you have a Demat account in a single name, you have to open a new demat account for joint holding.

• The investor can place an order for redemption with the broker and submit a delivery instruction slip (DIS) to transfer the mutual fund units. In a demat form, DIS is used to facilitate and authorize the sale or transfer of mutual fund units from one account to another.

• If you hold mutual funds units in demat form, you cannot opt for a Systematic Transfer Plan (STP) or Systematic Withdrawal Plan (SWP). STP and SWP can be necessary requirements for some investors for better financial planning, such as SWP for retirees. However, a Systematic Investment lan (SIP) is permitted.

• Although the options of redemption, Systematic Withdrawal Plan (SWP), Systematic Transfer Plan (STP), etc are available in the Demat Account, there is no option available to stop the SIP. You need to inform your mutual fund house as well as the bank via which your investment is made on a monthly basis regarding your plan to discontinue the SIP scheme.

• Due to lack of technological knowledge, such Demat account holders may depend on external sources for assisting them, who might not be very trustworthy. This may lead to account holders becoming the soft target for internet frauds, as they fail to be tech-savvy and diligent. In addition, many investors are not very meticulous when it comes to reading the underlying terms and conditions attached with the closure for their Demat Account and fall prey to paying additional charges.

While investment in MF schemes can be done easily with a few clicks through a Demat Account, investors may encounter difficulties if they want to do transactions through other methods, or if their demat account is not easily accessible, or if certain transaction options are not available on the demat account they are using, or if the demat service provider or depository participant (DP) has stopped providing services.

To Conclude...

Demat Account is a great tool in trading and it is considered wise to have a Demat account if you plan to invest in mutual funds. However, depending on your needs, you can choose the format to hold on to your mutual fund investments directly via online portals, apps, AMC official websites, or through an online Demat Account.

Investors should look for a platform which is a one-stop solution for their investment requirements yet keep their options open for other alternative platforms. Although it may appear that a Demat Account is your one-stop-shop, there are a number of platforms on the market that provide a single view report at a reasonable fee. Nowadays, even NSDL provides a detailed statement of all your mutual fund and stock holdings in one single go. Every six months, CAMS also provides a single Consolidated Account Statement (CAS) containing details of all holdings and their holding patterns.

Demat Account does offer a facility to keep and maintain many financial instruments at a single place, but it may not suit every individual's financial planning necessity. Notably, the SEBI, in particular, is aiming for greater transparency in the mutual fund industry. Now it is very easy to track your investments.

Therefore, investing in mutual funds through a Demat Account has become a personal choice for investors. If you are aware of the above-mentioned features of a Demat account and are willing to pay the associated fees and commissions, Demat accounts may be a better and more convenient solution for you. Suppose you want to invest directly in mutual funds and have a different financial planning strategy with calculated fees and professional advice; you may consult with professional advisors and financial planners and use other cost-effective platforms.

Warm Regards,
Mitali Dhoke
Jr. Research Analyst