Table of Contents
1. What is a Dematerialized (or Demat) Account in Stock Market Investments?
2. How is Mutual Fund Demat different from Shares and Securities?
3. Necessity, Desirability and Financial Perspective of Demat Accounts for Mutual Funds
4. Is it necessary to have a Demat account for mutual fund holdings? Is it desirable to have one?
5. Is SIP possible without Demat account?
6. Benefits of having a Demat Account for Mutual Funds
7. Drawbacks of having Demat Account for Mutual Funds
- Additional Charges on Mutual Fund Demat Accounts
- Complications in estate planning with Demat Accounts
- Limited Direct Investment Options in Mutual Funds
- Lack of Advisory Services for Demat Mutual Funds
8. The Investor’s take on Demat Accounts for Mutual Funds
9. Conclusion: Are Demat Accounts Worth It for Mutual Funds?
What is Dematerialized (or Demat) Account in Stock Market Investments?
Have you ever wondered how shares are stored digitally in today’s stock market?
A Demat account holds the owned shares in digital form; therefore, it is called a dematerialized (Demat) account. This account is essential for owning shares from the stock market.
By eliminating the need for physical share certificates, it reduces paperwork, ensures faster transactions, and minimizes the risks of forgery or loss of documents.
In Mutual Funds, the Demat account speeds up the Investment process and helps manage the account and sale of your funds. However, the Demat account is NOT necessary to buy Mutual Funds.
Demat account is quite similar to having a broking company that helps you to manage your funds.
You will figure out the details of the Demat account in Mutual Funds later in this post
In the modern financial world, the benefits of holding share and security investments in a dematerialized format, are known to many.
However, the advantages and drawbacks of holding mutual fund investments in the Demat form may not be as widely understood.
How is Mutual Fund Demat different from Shares and Securities?
The simple reason for this is that share certificates are mandatory for carrying out any financial transaction like the sale or transfer of shares, however the same does not apply to mutual funds as the periodic statement issued by the respective AMC managing the mutual fund, is enough for buying or selling the units held.
Shares often represent direct ownership in a company, while mutual fund units signify a pooled investment managed by an AMC, which is why their documentation requirements and handling differ significantly.
Necessity, Desirability and Financial Perspective of Demat Accounts for Mutual Funds
To dispel any doubts regarding the necessity of holding mutual funds in a dematerialized format the following specific queries may be discussed:
Is it necessary to have a Demat account for mutual fund holdings? Is it desirable to have one?
The answer to the first part of the question is no.
It is not mandatory to have a Demat account for investing in mutual funds.
Whether or not one should have a Demat account for mutual fund investment depends totally on the understanding of the particular product.
While it is mandatory to have a Demat account for shares, stock exchanges have now offer the option of holding mutual funds in Demat form.
The advancement of technology has made this possible, and NPS, bonds, corporate FDs, and even insurance policies can now be held in Demat form.
Is SIP possible without Demat account?
Yes, SIP (Systematic Investment Plan) is absolutely possible without a Demat account.
You can invest directly through Asset Management Companies (AMCs) or registered mutual fund distributors, which allow you to set up SIPs seamlessly.
These options enable you to automate investments, track your Investment Portfolio, and make withdrawals without the added requirement of a Demat account.
However, managing SIPs effectively goes beyond just setting them up.
A Financial Planner can help you align your investments with your financial goals, assess your risk tolerance, and create a well-rounded Investment Strategy.
Do you really need a Demat account when personalized guidance and simple tools can help you manage SIPs efficiently?
Sometimes, focusing on strategic planning is all you need to make your investments work smarter for you.
Does the Demat account help in better financial management from the perspective of financial planning? Will the financial planner advise clients to open a Demat account for mutual funds?
The Demat account does have some benefits for mutual fund holders.
Benefits of having Demat Account for Mutual Funds
1. Simplification of Transmission Process: The process of transmitting the units to the nominee in the event of the account holder’s death becomes simplified. With a Demat account, the legal heir needs to complete fewer formalities, as all holdings are consolidated in one place, making the transfer process more streamlined and less time-consuming.
2. Consolidated View of Investment Portfolio: A Demat account provides a single statement for viewing all holdings across different mutual fund schemes, making portfolio tracking easier.
However, there are some shortcomings in holding mutual funds in Demat form.
Here is a synopsis of such drawbacks:
Drawbacks of having Demat Account for Mutual Funds
i. Additional Charges on Mutual Fund Demat Accounts:
Holding mutual funds in Demat form attracts charges. which are an extra cost to the investor.
These charges often include account maintenance fees, transaction fees, and other incidental costs, which can add up over time and reduce overall returns, especially for small or infrequent investors.
ii. Complication in estate planning with Demat Accounts:
- Distribution Challenges: While planning a will, it might be necessary to distribute assets among multiple legal heirs. Holding mutual funds in Demat form can complicate this process.
- Separate Accounts Needed: For joint holding of mutual funds with a spouse or single holding, separate Demat accounts are required. This adds complexity to financial management.
- Bequeathing Assets: An individual might want to bequeath part of their holdings to their spouse and the rest to their children. Holding mutual funds in Demat form can create difficulties in such cases, jeopardizing financial planning goals.
iii. Limited Direct Investment Options in Mutual Funds:
Holding Mutual Funds in Demat form denies direct Investment options.
Those who choose to invest in mutual funds directly are not constrained and also save on commission costs.
It is a cost to the investor just for the benefit of using the electronic platform. This benefit per se is inconsequential and does not add value to the investment.
iv. Lack of Advisory Services for Demat Mutual Funds:
Advisory is not about just investing in mutual funds it is supposedly a service which provides a thorough overview of the particular fund keeping in view particular financial plans and needs.
Unfortunately, mutual fund Demat accounts do not offer any advisory services. It is just a platform where one can buy and sell mutual funds smoothly albeit at some cost.
Again, certain Demat accounts which do not allow SWP (Systematic Withdrawal Plan) and STP (Systematic Transfer facility), which are considered essential features for better investment and retirement planning.
Other than this there is hardly any value addition derived by holding mutual funds in Demat form.
The Investor’s take on Demat Accounts for Mutual Funds
There is no thumb rule in the domain of financial investment that suits everyone.
Each Individual’s financial plan for each individual is different, and the road map to achieving financial goals would require weighing different options.
Having a Demat account for mutual funds is not necessary because whatever limited benefit is derived from it is actually compensated amply by NSDL, which provides a single detailed statement containing all stock and mutual fund holdings.
This reduces the need for additional accounts while ensuring transparency and ease of access for investors who want to track their financial progress effortlessly.
CAMS issues a Consolidated Account Statement (CAS) every six months with details of different holdings patterns.
SEBI transparency efforts in the mutual fund investment domain further reduce the need for Demat accounts.
Conclusion: Are Demat Accounts Worth It for Mutual Funds?
Opening a Demat account for mutual funds is fine for those who want to have a quick overview of their holdings.
However, with the evolution of mutual fund platforms, the entire investment procedure can now be done online.
Demat accounts for mutual funds offer very few benefits while charging investors for transactions.
To learn about Mutual Funds in greater detail, you should read our Comprehensive Guide to Mutual Fund Investment.
For a proper financial plan tailored to your financial goals, a Demat account for mutual funds might not be the most efficient choice.
If you have any comments or questions, write them in the comment box below.
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I have a non demat MF account (Franklin India tax shield growth) purchased through a DP (IIFL).I couldn’t get any help from IIFL on this.When I opted for redemption,they(FRANKLIN)say it is to be converted into Demat form.I am clueless.Can you guide me?
If it is in non-demat form, Franklin will be able to assist you. If it is in IIFL demat account, pls get assistance from IIFL.