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26 Jun, 2024
7 mins read
It is a common understanding among investors that a Demat account is required only if you are into stock investing or trading. But did you know a demat account can hold other investments like SGBs, Bonds, ETFs and mutual funds? Read to know more about the benefits of holding mutual funds in a Demat account.
Investing in mutual funds is generally considered a safe and secure way to participate in the financial markets, especially compared to direct investment in stocks, due to its inherent benefits of diversification and professional management. Holding mutual funds in a Demat account adds an extra layer of security and convenience.
A Demat account is a repository that holds all your securities, including shares, bonds, SGBs, ETFs and mutual funds, in electronic format. It simplifies the management of financial assets, providing investors with a convenient and accessible way to handle their investments. This effectively reduces the risk of physical loss or damage to paper certificates. It further simplifies the tracking and monitoring of investments, ensuring transparency and ease of access. Therefore, while mutual funds are an excellent addition to an investment portfolio, adding a Demat account to the mix enhances security for investors.
Investment in mutual funds has become hugely popular with the Assets Under Management with the mutual fund industry topping Rs 50 trillion in May 2024.
Investment portfolios in mutual funds can be held either in the Demat account or in the Statement of Account form. So, how can investors decide which way to go? Here are the pros and cons of holding mutual funds in a Demat account to help investors make informed decisions.
Some of the top benefits of holding mutual funds in a Demat account include,
Holding mutual funds in a demat account simplifies portfolio management. All investments, including shares, bonds, and mutual funds, are consolidated in one place, making it easier to track and manage them without maintaining multiple records or log in details. The convenience of having a single view of the entire portfolio can help monitor overall asset allocation and make informed portfolio adjustments as needed.
Holding mutual funds in a Demat account streamlines the transaction process. Buying, selling, and transferring mutual funds become more efficient and faster since all transactions are recorded electronically. This eliminates the need for physical paperwork and reduces the risk of loss of units, errors, delays, and loss of documents, making the entire investment process more convenient.
A Demat account offers enhanced security for mutual fund investments. Since the units are held in electronic form, there is no risk of theft, forgery, or damage to physical certificates. Moreover, the digital records are maintained with high levels of encryption and protection, ensuring the safety of investment details.
A few disadvantages of holding mutual funds in a Demat account are,
One of the primary disadvantages of holding mutual funds in a Demat account is the additional cost involved. Investors need to pay annual maintenance charges for the Demat account and transaction fees for every buy and sell order on certain brokerages. These charges can add up over time and reduce the overall returns on the investments. Investors should be aware of these fees as they vary among brokers.
At FYERS, there are no AMC charges on the Demat account or buying of mutual funds. However, the selling of mutual funds units incurs DP charges.
Mutual fund transactions in a Demat account are limited to integral units, which means you can only buy or sell whole units of mutual funds, not fractions. Also, if investors wish to use a different trading platform, they first need to transfer their mutual fund units to another Demat account compatible with such a platform. This process can involve additional steps and might lead to platform lock-in, which means investors are tied to a specific platform for their mutual fund transactions.
While holding mutual funds in a Demat account offers ease in managing nominations and asset transfers, there are potential disadvantages. Unlike in a statement of account (SOA), where each folio can have a separate nomination, Demat accounts face limitations in this regard. A Demat account can have only one set of nomination/s for all the securities held in it. This limitation can create complexities and challenges in transferring assets to the intended recipients after the investor's demise, hindering efficient estate planning and succession.
Holding mutual funds in a Demat account means all transactions must go through a broker or depository participant (DP). This dependence can sometimes lead to delays or complications, especially if there are issues with the broker's platform or services. Additionally, there might be less direct communication and support from mutual fund houses since the broker acts as an intermediary.
While Demat accounts offer several conveniences, they also come with certain limitations. For example, SIPs and SWPs might not be as straightforward when executed through a Demat account. Fund houses may offer more flexible and straightforward options for SIPs and SWPs when investments are held directly with them.
Holding mutual funds in a Demat account can lead to several costs for investors that they need to be aware of as they can eventually eat into their overall returns. Some of these costs include,
Account opening charges can vary depending on the service provider.
The investor must pay annual maintenance charges on the demat account irrespective of the number of shares or mutual fund units held.
Transaction fees are to be paid every time investors buy or sell mutual fund units through a Demat account.
Stamp duty charges are levied on certain transactions involving mutual fund units which can vary depending on the state.
Additional charges like account opening charges, account closure charges, additional service fees, etc.
Selecting the best Demat account for mutual funds involves understanding various factors that can affect such choice. A few of these factors are explained hereunder.
Evaluate the credibility and services offered by the brokerage firm providing the Demat account.
Research their track record, customer service quality, and range of services.
Look for transparency, competitive fees, and a robust online platform with enhanced security protocols and smooth execution of transactions.
Understand the various fees associated with the Demat account and the transparency of the same.
Compare fee structures across different brokers to find a cost-effective option without compromising on quality.
Ensure the Demat account seamlessly integrates with major mutual fund platforms to get access to a wide range of mutual funds and support for SIPs and SWPs.
Look for brokers offering excellent customer support through various channels and efficient grievance resolution measures.
Access to educational resources and investment insights to make informed decisions about mutual fund investments.
While holding mutual funds in a Demat account is not mandatory, it does offer numerous benefits. The consolidated view of all investment portfolios in CAS (Consolidated Account Statement) along with the ease of carrying out transactions can make the Demat account for mutual funds a good choice despite its few limitations.
Yes, investors can hold all types of mutual funds like equity funds, debt funds, hybrid funds, gold funds, ETFs, etc. in a Demat account.
The transfer of mutual funds to a Demat account starts by confirming whether your Demat account is with NSDL or CDSL. For NSDL accounts, utilise NSDL e-CAS for online conversion while for CDSL, an offline visit to the mutual fund branch is necessary. Submit the Conversion Request Form (CRF) and Statement of Account (SOA) to the Depository Participant (DP) detailing the fund name, folio number, and units for transfer.
Yes, there are additional charges for holding mutual funds in a Demat account. These charges typically include annual maintenance fees, transaction charges, DP charges, etc.
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