A lot of investors are confused about whether or not they need a Demat account to invest in mutual funds. A Demat account is unnecessary and can prove to be absolutely wasteful when investing in mutual funds.
#1. No physical certificates
The basic benefit of a Demat account is that the investor does not have to hold any physical fund certificates when the investment is made.
There is no need for a Demat account, in the case of mutual funds because all records are electronic anyway. You don’t have any physical share certificates.
The mutual fund company will communicate a folio number to you which is like a Demat account number and send you electronic statements.
Since there are no physical certificates to store or safeguard, that important function of a Demat account is irrelevant for mutual fund investors.
#2. No trading account required
When you use Demat for your mutual funds, you must also open a trading account with the broker to transact in those mutual funds. This too is unnecessary.
In fact, having Demat restricts your options and adds costs.
You can invest in and withdraw from mutual funds simply by filling a paper form; online via the MF company’s website or online investing platforms like Scripbox.
#3. Additional charges
You have to pay an annual charge for your Demat account as well as some amount as transaction charge every time you invest or withdraw.
These charges are extra – over and above mutual fund charges. There may also be a charge for the trading account.
#4. Nominee restriction
With a Demat account, only a single nomination can be made, which can at times complicate the process of estate planning. If a person wants to distribute his or her assets to multiple people in different proportions, it gets difficult to do so with the funds lying in a Demat account.
Apart from nomination restriction, it is also not possible to hold an investment in joint names if the Demat account is in the name of a single person.
#5. Single view
Some people justify the cost of Demat accounts with the single view of all investments that they get in the trading account.
This is no longer relevant as NSDL sends all investors a single consolidated statement for all their investments, including mutual funds – whether they are in Demat or not.
A Demat account restricts your options and adds costs. It is unnecessary for mutual fund investing.