Is It Best to Hold Mutual Funds In A Demat Account? - Outside View by PersonalFN

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Is It Best to Hold Mutual Funds In A Demat Account?
Nov 7, 2019

It is a common knowledge that one needs a demat account to hold shares, but did you know that you can hold your mutual fund units in a demat form as well?

Mutual fund investors have the option to hold their units in statement of account (SOA) form or in a dematerialised (demat) account. In both cases, the units are held in digitised form and no physical certificates are involved.

Is it beneficial to hold mutual fund units in demat form? Let's find out ...

Unlike shares, holding mutual fund units in demat form is not mandatory. In case of SOA, the units are controlled by the respective asset management company (AMC) while in a demat form, it is controlled by a depositary participant (DP) such as Central Depository Services and National Securities Depository. Units in demat form can be purchased and sold through stock exchanges, broker or through your DP.

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

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Transmission of units to the nominee is simpler in demat form in case of death of the unit holder. If you have units in SOA, you need to submit a transmission request to the registrar and transfer agents (RTAs) of various funds.

[Read: How To Transmit Mutual Fund Investments Of Your Parents, As A Legal Heir]

However, there are certain drawbacks to holding mutual funds in demat form:

If you hold units in demat form, you cannot opt for a systematic transfer plan (STP) or systematic withdrawal plan (SWP). STP and SWP can be a necessary requirement for some investors for better financial planning. However, systematic investment plan (SIP) is permitted.

[Read: STP And SWP: How Do They Work]

You have to pay annual maintenance charges for holding a demat account, which is usually in the range of Rs 300-700, besides transaction charges (around 0.05% per transaction). Mutual funds in SOA form allows you to transact though investor service centres of mutual funds or its RTA, or you may transact online with no annual fees.

In case of demat account, one cannot have multiple account holders for a particular investment. This restriction can make it difficult to distribute investment amongst more than one heir.

When it comes to the purchase and redemption of liquid funds in demat form, the processing takes time as it is done at the DP's end. If you hold liquid funds with AMCs, purchasing and selling is facilitated on the same day.

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Earlier, one of the main advantages of holding a demat account was that you could view all your investments, including mutual fund, shares, bonds, etc., in a single statement. Nowadays, you can get a consolidated account statement from NSDL CAS for all your investments in securities including mutual funds, regardless of whether they are in demat form.

In addition, CAMS issues consolidated statement of your mutual fund holdings with detailed information of each holding.

[Read: How To Read Your Mutual Fund Account Statement Correctly]

The benefits of holding mutual fund units in SOA form far outweigh the benefits of demat account. Thus, it would be wise to opt for SOA mode.

If you wish to convert your mutual fund units from demat to SOA form, you will have to fill out a rematerialisation request form with your DP.

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Author: Divya Grover

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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Nov 14, 2019 12:35 PM