investing in mutual funds through demat account
At InvestmentYogi, we get a lot of queries on whether it is mandatory to have a Demat Account to invest in mutual fund schemes. The answer is NO. It is not mandatory to have a Demat Account to invest online on mutual fund schemes. Out of the many channels to invest online in mutual fund schemes like net banking, through respective Mutual Fund websites, online mutual fund platforms, through Mutual Fund registrars such as CAMS/Karvy, etc. owning a Demat account is one option.
Stock broking companies have come a long way since providing Demat facilities for stock investors and traders. Today they are offering a wide range of services including IPO/FPO subscription, mutual fund trading, investment in Gold through Gold ETF, investment in tax saving infrastructure bonds (under section 80CCF), trading in international stock exchanges, apart from the regular stock broking facilities. One can also use Demat Account to hold post office savings schemes such as NSC and KVP (now available in select cities only).
The procedure to invest in mutual fund schemes using a Demat Account is much similar to investing in stocks. Upon application for subscription (and KYC compliance fulfilment), the respective Asset Management Company (AMC) or Registrar and Transfer Agent (RTA) will credit the mutual fund units to your Demat Account.
The advantages and disadvantages of holding Mutual fund schemes in Demat Account are summarised below:
Convenient and Paperless transactions: You can centralize your mutual fund and stock investments at one place and/or have multiple schemes spread across fund houses. Also, there would be no tiresome process of form filling or giving documents every time you buy MF.
Simplifies the nomination requirements for your investments: This is true in case of a single nominee for all your investments.
Convenient in case of change in contact information: This consolidated platform Demat Account helps if the investor changes his address or mobile number. Instead of multiple applications to different Fund Houses requesting for change of address, you need to give just one application for the multiple investments you hold. Once the change in contact information is updated with your depository participant (DP), the same will get registered electronically with all the AMCs and RTA.
Higher charges: Trading and holding mutual funds schemes through Demat Account is a bit expensive compared to the same done through independent online mutual fund platforms such as FundsIndia and FundsSuperMart. Most Brokerage houses charge a flat fee for both lump sum and SIP investment in mutual fund schemes unlike the online mutual fund platforms who offer the same service for zero fees.
Advantageous if you are a Stock Investor: Investment in mutual fund schemes through Demat Accounts is useful and cost effective for those who also invest/trade in direct stocks. Otherwise, you are better off investing in mutual funds through other channels.
Not all schemes offered under Demat Account: You can purchase and hold units of mutual fund schemes of only those AMCs with which your Brokerage House has tie-up with. If you wish to invest in schemes of other AMCs, you may have to consider other channels (as listed above).
No Joint Account holdings: Joint account mutual fund investments cannot be held in a single holder Demat Account, and vice versa.
Conclusion: For all kind of online investment you need to have a bank account with online funds transfer facility. Choose the channel of mutual fund investment wisely as per your requirement and convenience.
Written by Priya Rao who is a CFP certified Financial Planner