Among various investment options, mutual funds are the most popular. Investing in a mutual fund is a terrific choice if you want a diverse portfolio of securities but wish to have professional fund managers choose the securities. You can invest in mutual funds via the official website or a Demat account. This article explores the need for a Demat account for mutual funds.
The Advantages of Demat Accounts for Mutual Funds
While you don’t necessarily need an account to buy mutual funds, having a Demat account for mutual funds offers the following advantages:
- Consolidation of Investments: With a Demat account, you can keep all your investments in one place. You can easily track and manage your money, making better investment decisions and reaping better returns.
- Comprehensive Statement: Your account allows you to view all your Mutual Fund holdings across different schemes in one statement.
- Online Accessibility: Online Demat accounts provide great accessibility. You can conduct fast and seamless transactions compared to storing your investments physically.
- Enhanced Security: Demat accounts offer better security. Documents, certificates, etc., cannot be physically lost or damaged. The account also reduces the chances of becoming a victim of a scam or theft.
- Nominee Feature: The nominee feature allows you to transfer units to a specific person if you pass away.
How Does a Demat Account Work?
You receive a linked trading account with your Demat Account, which has a unique login ID and password to buy and sell shares. Shares purchased are then stored in a Demat Account.
Buying or selling a particular stock requires you to sign in to your trading account linked to your bank account. Your Depository Participant (DP) immediately forwards ‘buy’ or ‘sell’ requests for a particular stock to the stock exchange once they are placed in your trading account.
If the stock exchange receives an order to ‘buy,’ it searches for sellers who want to sell the same share and instructs clearance houses to debit the seller’s Demat Account and credit the buyer’s Demat Account with the specific volume of shares. A single trade in the stock market works like this.
Buyers and sellers can hold Demat Accounts at different depositories.
Ways to Invest in Mutual Funds
You can invest in mutual funds without using a Demat account for mutual funds in various ways:
- Broker: Brokers provide Demat accounts for trading on the stock exchange. It’s recommended for investors who wish to invest in various avenues, including mutual funds, as it allows you to monitor all your investments in one place.
- Asset Management Company: AMCs offer mutual fund investment options on their official websites. You can invest by visiting their website, submitting your application with required documents, and managing your investments online.
- Offline and Online Distributors: Both online and offline distributors facilitate mutual fund investments. Online distributors provide a virtual investing experience, while offline distributors offer physical investment acknowledgments.
- Net Banking: Many private banks offer their account holders the option of investing in mutual funds through their online banking services.
The Necessity of a Demat Account for Mutual Funds
While a Demat account for mutual funds is a great facilitator for trading, it is not an absolute necessity.
Pros of Demat Accounts
- Convenient and hassle-free handling of securities stored electronically.
- Reduced risk of forgeries, thefts, and fake securities.
- Instant transfer of securities.
- Ability to buy or sell a single share.
- Online account management and updates.
- Wide range of securities available, including equity, debt investments, mutual funds, and gold ETFs.
Cons of Demat Accounts
- Costs such as account opening fees, transaction fees, custodian fees, and annual maintenance fees.
- Potential for frequent trading due to online access, impacting long-term investment goals.
- Requirement to acquire technical skills for account management.
Mutual fund investors no longer require Demat accounts for their investments. With the availability of net banking, purchasing mutual funds has become a more convenient and preferred method for many investors. Additionally, the transaction and annual fees associated with Demat accounts may make investing in mutual funds without one a more cost-effective choice for some.