A Demat account is a digital account that allows the holding of shares and securities in an electronic form. However, is it necessary to have one for mutual funds? What is the role of a Demat account for investing in mutual funds? Let’s find out.
What Is a Demat Account?
The Demat account was first introduced in India in 1996 upon the digitisation of the stock market. It was made compulsory for investors to open a Demat account for holding share certificates in a dematerialised, i.e., in an electronic form. Therefore, in other words, a Demat account is a digital account where you can keep all your dematerialised or digital securities in one place.
It can be used to store any type of security, such as stocks, mutual funds, bonds and derivatives.
The National Securities Depository Limited (NSDL) and the Central Depository Securities Limited (CDSL) are share depositories registered with SEBI for providing services relating to Demat accounts in India. They hold the shares of millions of stock market investors in an electronic form.
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Is Demat Account Necessary for Investing in Mutual Funds?
There is still prevalent confusion among investors about whether it is necessary to have a Demat account for investing in mutual funds. The simple answer is no. You can invest in a mutual fund directly through mobile apps and websites of mutual fund distributors or through registered agents of the respective mutual funds.
It should be noted that Demat accounts are necessary if you plan to invest directly in stocks of companies or the Exchange Traded Funds. On the other hand, although not necessary for mutual funds, it doesn’t harm to have one.
Let’s find out the benefits and drawbacks of having a Demat account to figure out if it will be the right choice for you or not.
What Are the Benefits of Investing through a Demat Account?
A Demat account will provide you with direct access to all the securities purchased by you. It also provides the following additional benefits:
- You will have all your securities in one place, which will help you manage all your transactions easily. This will help to make informed decisions about your investments to generate higher returns.
- Having an online Demat account is more beneficial than a physical, offline Demat account. For example, you can access your assets at any time from any place for quick transactions and other services.
- A Demat account is a secure place for storing all your securities. Also, it zeroes down the chances of physical damage or loss. Added to that, a Demat account lowers the risk of identity theft or fraud.
- You have the option to add a beneficiary who will receive all your securities in case of your unfortunate demise.
- Through a Demat account, you can manage your purchased securities on your own. There is no need for the intervention of a broker or intermediary. This also lowers the brokerage fee.
What Are the Drawbacks of Investing through a Demat Account?
Although a Demat account offers multiple benefits, it also has some drawbacks. These drawbacks may not affect all investors, but it is important to have knowledge of these before you make any decision.
Here are the drawbacks of investing in mutual funds through a Demat account:
- Fees and charges
The NSDL and the CDSL are SEBI-registered depository participants that provide depository services in relation to Demat accounts in India. If you decide to invest in mutual funds through a Demat account, you should know that these services are not free of charge. You have to pay annual maintenance charges.
Also, depository participants may levy transaction charges which can be substantial in the long run.
- Everything through Demat
Once you start investing in mutual funds through a Demat account, there will be no direct option to deal with your mutual funds. You have to do everything through your Demat account, and sometimes this can lead to problems.
Some of these problems may include not being able to stop your Systematic Investment Plan directly, not getting the option for a Systematic Withdrawal Plan (SWP) or Systematic Transfer Plan (STP), etc. These problems could act as deterrents to the smooth investment and redemption facilities that these plans provide.
A Demat account is a store hub for all your securities in an electronic form. Although there are advantages to storing mutual fund units in Demat accounts, it is not mandatory to have one for investing in mutual funds. Make sure to go through all of the pointers discussed above and make an informed decision.
Frequently Asked Questions
Are there any additional services provided by depository participants?
Tracking your investment holdings has been getting easier with each passing day. The NSDL and the CDSL provide a facility to get a detailed statement of all your mutual funds and stock holdings.
Who are depository participants?
Depository participants are intermediaries between the investors and the depositors. These organisations or companies store the securities in the dematerialised form and perform actions on behalf of the investors. The erstwhile paper-based settlement of trades caused substantial problems like bad delivery and delayed transfer of title which has been resolved through the setting up of depository participants.
What is the POA number of a Demat account?
The POA number denotes the Power of Attorney agreement. This agreement entitles the intermediary to operate the account on behalf of the investor legally.
How long does it take to open a Demat account?
Generally, it takes about 2 to 3 working days to open a Demat account if your documents are in order. However, this period may also extend in case the processing time is longer.
Animesh Gupta is a Chartered Accountant by profession and a NISM certified Mutual Fund Expert. He has over 4+ years of experience working in the Financial Services Industry. In his role at Wintwealth, he is part of the Credit and Risk team and evaluates the risk of the bonds available on Wintwealth's platform.