Mutual Funds in Demat Form : Pros and Cons

Before moving ahead with “what is demat account” and “pros and cons of mutual fund in demat form”, lets first have small introduction of mutual fund. According to the Association of Mutual Funds in India, mutual fund is a pool of money managed by a trust that collects money from a number of investors sharing similar investment objectives and invests the same in equities, bonds, money market instruments, and/or other securities.

What is Demat Account?

Demat Account is an account which holds individual’s securities in electronic form. You can hold dematerialized securities such as stocks, mutual funds, bonds, exchange-traded funds (ETFs), etc. in a demat account.

The concept of Demat Account was introduced in 1996. All physical share certificates were converted into electronic form and stored in Demat acoount.

In previous time, before demat account was introduced, a person needed to purchase share transfer stamps, visit the company’s registrar to get shares transferred or had to worry about share certificates being stolen. Now, Demat account made it easy to trade equity. Demat Account is mandated by SEBI for transactions of listed company securities.

In India, NSDL and CSDL are two depositories which contain all the Demat accounts. The depository participants act as an intermediary. Banks, brokers, and institutions function as depository participants (DP). It helps investors to access the central repositories.

So, it is compulsory to open a Demat account if a person wants to buy or sell equity or debentures. But mutual fund investor has an option to store securities in Demat account.

Mutual fund investor has the option to hold MF units in two forms:

1. Statement of Account (SOA) form
2. Dematerialized (Demat) account form.

In both cases, the units are held in digitised form and no physical certificates are involved.

Let’s read what are the advantages and disadvantage of storing mutual fund securities in Dematerialized account.

PROS of Mutual Funds in Demat Form

1. Demat account stores all securities at one place. Like shares, mutual funds, bonds, exchange-traded funds, and government securities. Demat account gets updated automatically when every time you transact.
2. There are no chances of fake shares, thefts with Demat account. Demat account is completely safe and accessed anywhere anytime.
3. If a person has invested in 15 different schemes, then he/she has to keep 15 statements to manage investments. But, Demat account makes it easy as all investment in stocks, MFs are at one place.
   But, now a days, CAMS issues consolidated statement of mutual fund holdings with detailed information of each holding.
4. Nominee/legal heir has to submit a single transmission form to transfer all types of securities in the account holder’s demat to their own. Otherwise, nominee would have to send transmission request to the registrar and transfer agents (RTAs) of various funds.

Read Also: Why are People Scared of Investing in Mutual fund or Stock Market in India?

CONS of Mutual Funds in Demat Form

1. Investor has pay to open Demat account and annual maintenance charges ranging from Rs 300 to Rs 700.
2. Transaction of mutual fund units in Demat account would also be charged. It depends upon the Depository Participant (DP).
   Mutual funds in SOA form allows you to transact though investor service centers of mutual funds or its RTA, or you may transact online with no annual fees.
3. Transaction process for buy/sell of units lengthens due to added intermediaries like depository, broker.
4. Mismatch in name of de-mat and bank account may delay redemption process
5. Investor cannot opt for systematic transfer plan (STP) or systematic withdrawal plan (SWP) through Demat account.
6. If you hold a liquid fund in in demat form then redemption or purchase process take time. But if investor holds liquid fund with AMC then purchasing and redemptions are done on same day.
7. Investor cannot have multiple account holders for particular investment. 

So, holding mutual funds in SOA form instead of Demat form is more beneficial.

Read also : How to read a Balance Sheet?

FAQ

What is the difference between CDSL and NSDL?

NSDL has National Stock Exchange (NSE) as the primary operating market and CDSL has Bombay Stock Exchange (BSE) as the primary market. 

What is DP in MF?

In India, NSDL and CSDL are two depositories which contain all the Demat accounts. The depository participants act as an intermediary. Banks, brokers, and institutions function as depository participants (DP).

How can I hold my mutual fund in demat account?

• Obtain and fill up Conversion Request Form (CRF) from your DP.
• Submit the CRF along with the Statement of Account (SOA) to your DP.
• After due verification, the DP would send the CRF and Statement of Account to the Asset Management Company (AMC) / Registrar and Transfer Agent (RTA).
• The AMC / RTA after due verification will confirm the conversion request executed by DP and the mutual fund units will be credit in your demat account.