Mutual Fund Investments through Demat Account – Pros and Cons
Mutual Fund Investments through Demat Account – Pros and Cons
Mutual Funds offer diversified investment strategies where one can invest in equity, debt or gold. Mutual Fund investments need not be in demat form. You can simply go through MF broker or directly visit AMC website and buy the funds. However, if you are investing in shares, tax saving bonds, NCDs etc., many of you might get doubt, why not mutual funds. What are the advantages of investing mutual funds through Demat Account? What are the major negative factors of investing in mutual funds through demat account?
What is Demat Account?
Demat account in simple term is holding securities in dematerialization form. Earlier investors used to hold the shares in physical certificates. While the concept of dematerialization of shares came in 1966, but this came late to India in 1996. There are several stock brokers offering free demat and trading account in India now.
What can we hold through demat account?
We can hold the following in dematerialization form.
1) Shares of the company
3) Exchange Traded Funds
4) Mutual Funds
5) Non-Convertible Debenture (NCDs)
6) Government Securities
7) All bonds, including Infrastructure Bonds
8) Other securities which are required to be held in demat form
If you are already investing in a few of them, you might get doubt that why one should not invest mutual funds also in demat form. Many of you might have invested in mutual funds in the non demat form.
What are the advantages of investing in Mutual Funds in Demat Form?
Here are some pros of investing MFs in demat form.
1) All in one account
You might be investing in shares, bonds, government securities etc., Many have 3-in-1 account (Demat, Trading and bank account) also. However, buying mutual funds also through demat account would have complete control on all investments in a single account at central place.
2) Paperless Transactions
Holding mutual funds in demat account would help you to have paperless transactions. I have seen that still there are many MF investors who buy through brokers or banks by filling the paper application. Investing through demat account means paperless transactions.
3) Avoids pain when investing in multiple Mutual Funds
If you are investing through various mutual fund schemes, you might need to keep track of all these transactions (especially when going through various AMC websites). If you are investing through demat account, all transactions would be at one place and tracking them would be easier.
4) Shares held in physical form – Risk of theft by fraud
If you are investing through MF broker, there is the risk of fraud. Also, if you have invested in paper form, there is the risk of theft or misplacement of such MF investments. You or your family (in your absence) may face difficulty in tracking such documents when really needed. Investing through demat form would avoid this situation.
5) Easy Transition of Mutual Funds in the case of death of the investor
When there is death of the account holder of mutual funds, the transition is one of the painful process. One need to declare a nominee for each mutual fund account. If there is a change in nominee, one need to do this again for all mutual fund schemes. If an investor not updated nominee and there is death of the investor, their family need to provide several documents to get the mutual funds transferred in their name. However, in case of demat account, there is only one nominee for all shares, mutual funds and all securities held in that account. It would be simple to update a nominee one time at one place if investments are done through the demat form.
6) Single Place in case of change in details of MF investor
Investors might want to change an email Id or mobile number or change of address. MF investor can go to demat account and make this change in one place instead of visiting to multiple places like visiting every mutual fund house and asking for an update.
What are the negative factors or cons of investing in mutual funds through demat account?
Here are the major cons of investing in MFs through demat account.
1) A fraudster can target your demat account
If some fraudster targets your demat account, your entire holdings, including mutual fund holdings can get transferred to their account.
2) Demat account comes with charges
If you are already having demat account, then annual maintenance charges of Rs 300 to Rs 700 might not get affected when you invest your mutual funds too. Otherwise, you need to incur this every year.
If you are buying or selling mutual funds, then it would have transaction charges too. E.g., Some demat brokers are charging Rs 20 per transaction. If you are doing 5 SIPs for Rs 10,000 per month, you end up paying Rs 100 (1% of the investment). Understand the transaction charges before you invest mutual funds in demat form.
3) Demat account would be inactive of there are no transactions
Even if you have investment holdings like shares or mutual funds through demat account, if there is no activity for few years, demat account can become inactive. It would be painful process to activate them again.
4) SWP not possible
Systematic Withdrawal Plan (SWP) which is a popular tool used to get regular inflow especially by retired individuals, is not possible if investors are investing through demat account.
5) Cumbersome process to convert existing MFs into demat form
One needs to undergo a cumbersome process if they want to convert their existing mutual funds to demat form. Such conversion comes with fees. Some of the depository participants (DPs) are waiving of such fees for short term to attract customers.
6) Direct Plans might not be available through demat account
I have observed that many demat account brokers are offering only regular plans and not direct plans (e.g., ICICIdirect). Hence, if you are planning to invest in direct plans of mutual funds, check with demat account broker before opting.
7) Only few MF schemes offered by demat broker
Your demat account broker might not offer all mutual fund schemes. They might offer selected schemes. You would not have the flexibility of investing in the schemes which you prefer.
Mutual Funds in Demat Account or Non Demat Form – Which is better?
I could see two major advantages are “one consolidated view of investments” and “account information update including nominee updating in single shot” if you want to go for mutual funds in demat form.
Beyond this, there is no major advantage of investing in mutual funds through demat form.
Investors might argue saying how they can see a consolidated view of their statements. You can invest through mutual fund broker websites (FundsIndia or ICICIdirect etc.,) or invest through Mycams or Karvy (direct plans) or direct mutual fund platforms like Kuvera, Groww etc. and get consolidated list of all mutual fund schemes.
However, everyone would have their own view. If you think investing mutual funds through demat account is a favorable approach considering all the pros and cons indicated above, you can go ahead.
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