Mutual Fund: To Demat or Not Demat?

Why Dematerialization?
It would not be wrong to say that in the modern financial world, the benefits of holding the share along with the security investments in the dematerialization format is quite well known to many people. However, the consequences of holding or not holding the mutual fund investment in none other the Demat form, may not be that popular.

How is mutual fund Demat different?
Mutual funds are quite differ from shares as well as securities. Actually, the intrinsic value of the share and security certificates are quite higher than that for the mutual fund certificates.

Moreover, the simple reason for this is that share certificates are quite mandatory for carrying out any sort of financial transaction such as sale or transferring the shares. However, one thing that needs to be mentioned here is the fact that the same does not apply to the mutual funds because the periodic statement is issued by the respective AMC, as managing the funds is enough for buying or selling the held units.

Necessity, Desirability and Financial Perspective
When it comes to dispelling any doubts regarding the necessity of holding the mutual funds in dematerialized format, below are the few queries that may be discussed:

It is necessary to have a Demat account for mutual fund holdings? Is it mandatory to have one?

Well, the answer to this question is absolutely NO. Yes, it is not mandatory to have open the Demat account when it comes to investing in mutual funds. More to the point, whether or not, one should have a Demat account for mutual fund investment depending upon the understanding of a particular product.

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While it is compulsory to have a Demat account for the shares, these days stock exchanges have come up along with the option of holding the mutual funds in the Demat form also. However, the advancement of the technology has made this possible and NPS, bonds, corporate FDs and even the insurance policies can now easily be held in the Demat form.

Does Demat account help in better financial management from the perspective of financial planning? Will the financial planner advice clients to open a Demat account for mutual funds?

When it comes to Demat account, it offers some benefits to the mutual fund holders.

And, one of the prime benefits among them is actually the simplification of the process of transmission of the units to the nominee in the case of the unfortunate demise of the account holder.
This also provides a statement for viewing all the holding across various schemes for mutual funds.

However, one thing that needs to be mentioned here is the fact that there are few shortcomings in the holding the mutual funds in the Demat form. Well, below is a synopsis of such drawbacks.

Charges:

Holding the mutual funds in the Demat form actually attracts the charges. And, these charges act like an additional cost to the investor.

a. Complications in estate planning

It is usually that while planning a WILL to bequeath the assets held in the name of a person, there is a need to distribute it amongst more than one legal heir. Well, in such a case holding mutual funds in the Demat form can make it more complicated.

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There are some restrictions in place regarding the joint holding of the mutual funds in the Demat form. If anyone wants to hold some mutual funds jointly with their spouse and some on the single holding basis, it is better that they should have a separate Demat account in order to hold the same jointly and on single basis.

It is possible that an individual would like to bequeath a part of his holdings to his/her spouse, and rest to his/her children. Thus, in such situation, holding the mutual funds in Demat form can actually give rise to many more hurdles, hence jeopardize the perspective of the financial planning of the person.

b. Indirect Option:

Holding the mutual fund in Demat form actually denies the direct options. Those who prefer to invest directly in mutual funds are not constrained, and also save the commission costs. Well, basically it is the cost to the investor just for the benefit of using the electronic platform. Moreover, this benefit is inconsequential and does not add the value to the investment.

c. Lack of Advisory

Advisory is not about investing in the mutual funds actually it is supposedly a service which gives a deep overview of the particular fund, keeping in view the particular financial plans as well as needs.

But, unfortunately, mutual fund Demat accounts don't give any advisory service. It is just a platform with the help of which you can buy and sell mutual funds very smoothly. Not only this, in fact there are few Demat accounts which don't allow SWP i.e. Systematic Withdrawal Plan and STP i.e. Systematic Transfer Facility, which are actually considered as the essential features for the better investment as well as retirement planning.

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Other than this, there is hardly any value addition derived by beholding the mutual funds in the Demat form.

The Investor's Take

As far as the domain of financial investment is concerned, there is no thumb rule that can suit to everyone. The financial plan for every person is different and the road map to achieve the goals would actually require the weighing different options.

Having the Demat account for mutual funds is not a necessity because whatever the little benefit which is derived from it actually compensated amply by NSDL who provide a single detailed statement, containing all stocks as well as mutual fund holdings.

Moreover, CAMS issues a consolidated account statement every six months with the details of different holding patterns. While SEBI on its part is striving to offer the maximum transparency in the domain of mutual fund investment.

Conclusion

Opening a Demat account for mutual funds is good for those who really want to have a quick overview of all their holdings. However, other than this, the demat account for mutual fund offers very less benefits while charging the investors for the transactions. Thus, for a proper financial plan so as to be drawn up and implemented the demat account for the mutual funds would actually perhaps look out of place.

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