Mutual funds offer returns based on investors’ risk-taking appetite and the asset classes and schemes selected. However, many people may not be clear if they require a demat account to invest in a mutual fund scheme.
Sebi-registered investment adviser, Sudheer M, advises against opening a demat account due to additional charges. "I would prefer not for another intermediary to get a cut aside from fund houses. The demat route also has an annual maintenance fee." He suggests that investors go directly to fund houses or use platforms like MF Central or MF Utility for direct plans.
While a Demat account's much-touted advantage is that it allows tracking of all mutual fund holdings in one place, Sudheer says MF Central and MF Utility also offer the same convenience. These portals display all folios, providing a user-friendly experience.
"You can view all your MF folios under MF Central, just like with a demat account. However, if you wish to see your stock holdings along with MF investments, a demat account helps," Sudheer says.
MF Central, powered by KFintech & CAMS, is an investor services hub for transacting across multiple folios. Mutual Funds Utility (MFU), under the aegis of the Association of Mutual Funds in India (AMFI), acts as a transaction aggregation portal, enabling single payment for investments across various mutual funds. Both platforms provide comprehensive information on schemes and units across different fund houses.
Demat Account
A Demat account holds securities like stocks, mutual funds, exchange-traded funds (ETFs), and bonds in dematerialised form. The depositories, the National Securities Depository Limited (NSDL) and the Central Depository Services (India) Limited (CDSL) provide demat accounts in India. Depository participants, such as banks and brokers, act as intermediaries between depositories and investors to facilitate the holding and transfer of investment units.
You also need a trading account to invest in mutual funds through a demat account. Once you open a demat account after the know-your-customer (KYC) process, investors can invest in mutual funds through brokers.
Benefits Of Demat Accounts
A Demat account provides a consolidated view of the holdings, simplifying tracking and management of investments. The centralised information in a single account helps nominees keep track of the holdings instead of going to different platforms of the fund houses.
Cons
There are charges associated with demat accounts, including brokerage fees, transaction charges, and annual maintenance charges. The prices may vary between brokers. For instance, ICICI Direct says the Demat account annual maintenance charges amount to Rs. 700 for its customers, but the charges are waived for the first year.
Some brokerage and trading platforms, like Upstox, claim to waive maintenance and commission charges for opening an online demat account. "There is zero commission when you invest in mutual funds or IPOs," says Upstox.
Alternative Options
Direct investment through an asset management company's website is an option. Nowadays, AMCs have mobile applications, which have proved to be faster, where you will need to submit an application form, a copy of your PAN card, and KYC documents. Once your application is approved, the company will provide you with a PIN and folio number that you can use to manage your investments.
A few online portals also offer a facility to invest in direct plans. "However, such online portals are run by private firms that offer robo-advisory financial planning services, usually for a fee, which could be per year or transaction," AMFI says.
MF Central and MF Utility also offer similar benefits to Demat accounts. In conclusion, opening a Demat account for mutual fund investing provides benefits like centralised holdings and ease of nomination. However, investors should consider the associated charges and explore alternative investment options before deciding.
The Final Word
If you are planning to invest only in mutual funds, there is no need to open a demat account. Only investment in ETFs requires you to have a demat account. The good thing is that the fund houses allow investors to invest in ETFs through the fund-of-fund route, whether you want to invest in commodity ETFs like gold and silver or any other thematic or index ETFs. All fund houses have fund-of-fund schemes for non-demat users.