Mutual Funds are one of the most popular instruments used by investors to participate in the equities markets. They have the advantage of carrying relatively low risk as compared to investing directly in stocks while generating for investors returns comparable to direct participation in the markets. For this reason, mutual funds are popular among new and entry-level investors as well as among seasoned investors. With the advent of online trading, it is now possible to use your demat account for mutual funds as well.
What is a Demat Account
A demat account is an online trading account that you open with a depository participant (DP) in which your holdings are stored in a dematerialized or online form. Starting in 1996, demat accounts have almost completely replaced physical possession of equities. You can use your demat account for mutual funds, shares, commodities, ULIPs, futures, and options, etc.
What are Mutual Funds
A mutual fund is a financial instrument in which money from a number of investors is pooled together to be invested in equities under the supervision of a professional fund manager. To mitigate risk, mutual funds often have a diversified portfolio in which capital is spread across a number of holdings. Mutual funds have the advantage of giving similar returns as equities at a relatively lower risk profile.
Mutual Funds in Demat Account – Pros and Cons
Just like shares, mutual funds can also be held in your demat account. This has its own set of pros and cons.
Centralized Repository of all Your Investments
By using a demat account for mutual funds, you can keep all your investments including shares, commodities, ULIPs, etc. in a single place. This allows easier monitoring and evaluation of your assets.
Safety From Physical Damage and Theft
Using a demat account for mutual funds means that there is zero chance of your mutual funds getting damaged, lost, or stolen as these are stored in electronic format.
Ease of Nomination
When you open a demat account, you appoint a nominee to whom your assets in the demat account pass on in case of death. By using a demat account for mutual funds, nomination becomes easier as all your assets can easily be passed on to your heir. If you were to hold mutual funds in physical format, the nomination process would be more complex as you would have had to apply to have a nominee for each different asset class.
Hassle-free Loan Application Process
With demat mutual funds applying to loans becomes much more convenient than if you were holding your mutual funds in physical form. In the latter case, the bank first has to write to the registrar of your mutual funds to mark a lien, and then the registrar writes back to the bank with a whole lot of paperwork exchanged.
Annual Maintenance Costs
Annual Maintenance Charges (AMC) usually between Rs. 300-400 have to be paid for holding a demat account.
With demat mutual funds, an investor also has to take into account depository participant charges per instruction that are applicable at the time of redemption of units.
Potential Delays in Transactions
As the number of intermediaries between the buyer and the seller increases due to the presence of the broker and the DP in the chain, sometimes buying and selling of mutual funds with demat accounts can take longer.
Good Demat Account for Mutual Funds
Considering the various pros and cons listed above, one can zero in on the better demat account for mutual funds by comparing demat account features offered by various brokers. The better demat account for mutual funds would be one that offers all the pros with a few of the cons associated with demat mutual funds. This means a demat account that has no or minimal charges and offers fast and convenient services. Angel One is quite reputed and offers demat accounts for mutual funds with low charges and minimal processing.
How to Open a Demat Account for Mutual Funds
Opening a demat account with a reputed DP is a simple and hassle process:
1. Fill out the application form provided by your broker/DP along with copies of KYC documents such as identity proof, address proof, and passport-sized photographs.
2. Provide PAN details as these are mandatory for opening a demat account.
3. Once your DP has received all your documents these will be verified. Once verified and approved you will be given a login ID and password to log in to your demat account.
4. Once you have your demat account details, you need to link your demat account to your bank account in order to easily transfer funds between your demat and bank accounts.
That is all. You can now start investing in mutual funds using your demat account.
Mutual funds are a great way to invest in the stock markets especially for new investors who do not want to risk their capital investing in stocks directly. Demat mutual funds provide a convenient and easy way to invest in mutual funds provided you open a demat account with a reputed broker that levies minimal charges and provides ease of transaction for your demat mutual funds.