A lot of investors have been investing online on mutual fund schemes through demat account.  They are prone to think that it is compulsory to have a Demat Account for transacting online mutual fund schemes. However, large number of eager investors who would want to invest through a demat account for transacting online mutual funds have good news that it is not compulsion to have a Demat Account to invest online on mutual fund schemes.Though, demat account allows you to transact online and centralize your mutual fund and stock investments at one place spread across fund houses, it is a bit expensive compared to be done the same through independent online mutual fund platforms. Currently, mutual funds are being sold through large nationwide distributors like banks, stock brokers and also independent online platform. Of these, banker and stock brokers are induced only to open compulsorily demat account for their clients to transact online mutual funds schemes and stock trading. But, it is not economical method to transact online, especially for mutual funds. There are several layers of costs associated with holding mutual fund units in demat form: the depositories and brokers are both out to claw some money from you. A closer look at execution for demat MFs reveals that one would have to pay a charge to open the demat account, as well as the annual demat fees. Since holding mutual funds in demat form is not compulsory, unlike shares, investors should exercise the smart choice, avoiding to go the demat route. Why? Consider this..

demat

No Hassle Free Process

While opening demat account, many times there’s confusion regarding the differences in the name, or the initials in the name in which the demat account is opened and the one in the bank records. If the demat account has the name Amit K Shah and the bank account has the name Amit Shah, getting the amount credited could take months together. Banks have a habit of putting these kinds of small disputed amounts mindlessly in a suspense account and making you run around for it. At that time, you will not look smart and NSDL will surely not be anywhere to help. That is not all; you cannot have multiple folios and use options such as systematic withdrawal or systematic transfer and daily, weekly or fortnightly dividends. Moreover, there is no physical way to hold mutual fund units. Mutual fund units are held by RTAs and the investor gets account statements. The investor does not get a physical unit or any other certificate. They can get a consolidated statement of mutual fund investments on his e-mail by directly requesting the RTAs. Even, converting demat mutual fund units into non-demat form could not be feasible, if DP investors want to migrate to other independent online platform to save the cost of DP so as they have to redeem all units of mutual fund in demat form.

Avalanche Cost for Mutual Fund Investors

If a one-time investor in a mutual fund wants to invest Rs5,000, he has to spend Rs1,000 (20%) of his investment value for demat account opening and other charges, after that also he has to pay yearly charges. If the market is not able to generate returns he will lose 50% of investment in charges only. Sales of units would also involve a charge of Rs20 on each occasion. This charge varies from DP to DP. And if the DP is not the bank that is directly linked to the AMC, it could take around 7-10 days for the money to be credited to your account. The demat route has brokerage costs as well. The broker charges his normal commission at the time of purchasing or selling MF units, generally 0.30-0.40% of the value of units bought or sold. Again, the brokerage is negotiable and depends upon the broking firm one chooses. An investor using an online brokerage portal will be charged by the online trading company. Most importantly, while dealing through stock brokers, you cannot do SIPs/STPs, which are very popular with mutual fund investors. Most of the banks are opted out of levying one time transaction fee of Rs 100 is deducted for subscriptions of more than Rs 10,000. In the case of a first time investor, the fund may deduct up to Rs 150 from the subscription. In the case of an SIP, the transaction fee is charged in four tranches if the total commitment through the instalment is Rs 10,000 or more.

Conclusion

It is true that equity investors hold their equity shares in demat form is a compulsion. But, in the case of mutual funds, the statements of account are not certificates-hence there is no need to save them from fire or flood; there is no fear of misplacing them as they are already electronically handled by the registrar; one just needs the folio number. As outlined above, opening of a demat account requires further paper work in addition to the mutual fund KYC. Moreover, holding units in a demat account involves additional costs charged by the depository participant. Investors already have an option to buy/sell units online. Like  demat account may consolidate all of one’s holdings and allow a view of investments in a single snapshot, there are also some third party platforms that allow distributors to buy/sell units for the clients which are cheaper, involve less processes and paper work. SEBI had launched the online platform NMF-II on the National Stock Exchange (NSE) for transacting online mutual fund without demat account.  AMFI had also developed MF Utility platform to enable mutual fund transactions online which is totally free from any costs. Even, leading registrar and transfer agents, CAMS and Karvy, both of which service almost the entire industry, have a system to provide online consolidated statements across all mutual funds to investors.

I do not think that demat route for mutual fund transactions would benefit a large section of investors as it involves a lot of added and some parallel processes which mean extra costs.

 PS: This article got published in Hindi Dainik Bhaskar on 21-06-2016

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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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