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Is Demat Account Necessary for Investing in Mutual Funds?

Technology has done wonders in our everyday lives and the stock market has also not been left untouched. Much has changed since the open floor trading exchange where traders would shout prices for stocks for buying and selling shares. A demat account is a single place which holds all your shares in a dematerialised or electronic form. All the certificates of your investment portfolio is held in the demat account such as bonds, mutual funds, government securities and shares. A demat account basically simplified trading in mutual funds. Stock broking companies now offer various services such as mutual fund trading, IPO/FPO subscription, investment in tax saving infrastructure bonds, international stocks, Gold ETF, etc. for demat account holders.

Although it is a great tool in trading and considered wise to have a demat account if you plan to invest in mutual funds, it depends on the requirement of the investor. Technology has further advanced and stock exchanges offer their own platform for mutual fund investments such as CAMS or Karvy. There are other channels such as net banking as well.

While Demat account comes with many benefits such as:

  • Simplified Nomination Requirements – If you have a single nominee for all your investments in your demat account, you need not worry any further.
  • Paperless Transactions – Whether an investor chooses to invest in mutual funds or stocks or multiple schemes, he or she does not require to fill multiple forms and submit endless number of documents, each time you buy a fund.
  • Easy Change in Information – Demat account is a consolidated platform where an investor can change his information at any time. You do not have to send multiple applications to all fund houses, you can just send one application to update your information.
  • Advantageous for Stock Investor – If you invest or trade in direct stocks, operating through a demat account is mostly cost effective and useful.

However, there are some flaws from the perspective of financial planning.Many investors do not have a clear awareness about the need for Demat account for making investments in mutual funds. A Demat account has multiple benefits but is not needed when it comes to mutual fund investments. The following are the reasons that explain why:

No physical certificates

A Demat account eliminates the need for holding physical certificates when making an investment in case of share market securities. But in case of mutual funds, a Demat account is not needed as there are no physical certificates involved and all records are saved electronically. The mutual fund agency allots a folio number to each investor which acts like a Demat account where all fund related information is communicated to the investor. As there are no physical certificates to safeguard or store, Demat account is futile when it comes to investing in mutual funds.

Trading Account Not Required

When an investor opens a Demat account, they also must open a trading account with a broking agent which is an unnecessary work when all you wish to do is invest in a mutual fund. It in fact puts several restrictions and increases the cost of investment. Making investments or withdrawing investments can be easily done by simply filling in a paper form via the mutual fund’s website or through different online third-party websites.

Consolidated View Of Investments

A lot of people justify the cost of a Demat account as it provides them with a single screen view of all the investments. However, this justification is no longer relevant as the NSDL now sends the investors with a consolidated view of their investments that includes mutual funds as well. A Demat account thus restrict your alternatives and adds to the cost when it comes to mutual fund investment.

Additional Costs

For holding a Demat account, one needs to pay the annual charges and transaction charge every time you make or withdraw an investment. This cost is over and above the charges you pay for mutual fund investment. The trading account too may have an extra charge.

Restrictions On Nominee

Only one nomination can be made with a Demat account which may make the process of estate planning complicated. If you wish to distribute your assets with more than one person in varied proportion, it becomes difficult with a Demat account. Other than the restrictions on nominee, an investment cannot be held jointly if the Demat account is in the name of a single person.

Investors should look for a platform which is a one stop solution for their financial requirements, yet keep their options open for other alternative platforms. Choosing a platform for investment would entirely depend on the investor’s requirement as well as cost effectiveness of the platform. Although it may seem demat account is your one-stop-shop to go to, there are many platforms in the market that offer a single view report at affordable prices. Even NDSL provides a detailed statement of all your mutual fund and stock holdings in one single go. CAMS also issues details of all holdings along with their holding patterns in a single consolidated account statement every six months (CAS).

GST rate of 18% applicable for all financial services effective July 1, 2017.

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