Holding mutual funds in demat form
Today it is possible to hold even open ended mutual funds in demat mode. Investors have the choice. They can either hold these open ended funds in the normal statement mode, or they can hold it as part of the demat account. In fact, mutual funds can held in the same demat account where you already hold your equity holdings, ETFs and other assets. Investors often wonder if it is a good idea to hold mutual funds in demat form?
An important to remember here is that mutual fund units are already held in non-physical form and the statement is only an acknowledge of your holdings by the AMC / registrar. In demat holding, it is just that these mutual funds also appear as part of demat holdings.
Advantages of holding mutual funds in demat form
To be fair, there are certainly some advantages of holding mutual funds as part of your existing demat account. Here are a few advantages enumerated.
- Holding mutual funds in demat account is a good method of getting a consolidated picture of your net worth at a single point. You get a real time valuations of your holdings in equities, ETFs, bonds and mutual funds in one single place.
- We often want to transfer units of mutual funds as a gifts to relatives by doing an off market transfer. If these mutual fund units are held in the demat account, such a transfer of units becomes a lot simpler and also seamless.
- An important aspect of holding mutual funds in a demat account is the seamless transmission of mutual fund units that it enables. The nominee to the demat account, automatically gets all the units transmitted to their name on death of the holder.
Disadvantages of holding mutual funds in demat form
Holding mutual fund units in demat form, also has some downsides to it. Here are few of the disadvantages outlined.
- While single nominee for a demat account can be a simplification from an administrative perspective, it also complicates things when you want to write a will or do estate planning. The reason is that your demat account can have a single nominee or set of nominees for the entire demat account. You can bucket specific assets for specific transmission and that makes it rather rigid. This disadvantage is largely obviated by holding units in statement form and then willing specific number of units to specific individuals as part of the testament. This can avoid a lot of legal wrangles later.
- The problem arises if you have a demat account in your individual name but want to hold the mutual fund units in joint holding with your spouse. In such a case, a joint demat account would be required in the same order as the mutual fund units are held. A simpler and more economical way would be to hold the units in statement unit form.
- Holding mutual fund units has a cost and the cost can be quite steep. To begin with, there are annual charges or AMC that you have to pay to your depository participant each year. Most DPs also levy “Opt-in” charges for first time conversion of mutual fund units to demat units. Such charges are Rs150 for first time opt-in and Rs100 for subsequent opt-ins. This is normally applied to transactions above a certain limit.
- Today, the Direct option in mutual funds offers you a more economical method of investing in mutual funds with lower total expense ratio (TER). Incidentally, in a demat holding, there is no Direct Option. In this case, the default broker becomes the agent and full TER is charged. That can reduce your long term return.
- One reason, mutual funds are preferred by retail investors is that they offer flexibility of investment in the form of systematic investment plans (SIP), systematic transfer plans (STP) and systematic withdrawal plans (SWP). These are methods that offer rupee cost averaging and also tax efficiency, but these can be managed on auto mode through demat holdings.
To sum it up, holding mutual funds in demat account does have some merits, but it also leads to a loss of flexibility and also results in higher cost due to absence of Direct Option. At the same time, it must be remembered that even when you hold the mutual fund units in statement mode, there is no physical paper involvement and it is already in non-physical mode only.