You don't need a demat account for your mutual funds

Dematerialisation is holding financial securities in an electronic form in a demat account. There are two central depositories in India-Central Depository Services (India) Ltd (CDSL) and National Securities Depository Ltd (NSDL)-that issue and maintain all demat accounts. They operate through depository participants (DPs), which can be an entity like your bank or broker. While stocks sold via exchanges need to be held compulsorily in the demat format, for mutual funds (MFs), this is not so.

Physical Statement Versus Demat Holding
You can buy MFs through a distributor, directly through a fund house's website or through your broker on stock exchanges. Earlier, to buy through an exchange, a demat account was necessary. But now you can transact in MFs on exchanges (via a registered adviser or a broker) without opening a demat account. MF investors get a statement of account, which shows details of their holdings such as purchase value, number of units and current value. If you want to hold your MF units in demat, you can either opt for it through the application form or choose to buy directly in demat form through a broker on a stock exchange. The statement of account is issued by a registrar and transfer agent appointed by your asset management company (AMC), whereas a demat statement is maintained by the DP who you chose to open the account with. A demat account is not compulsory but for investors who have a portfolio of stocks and funds, it may be useful given that holdings can be seen in one place. However, starting this financial year, investors who have a demat account will get a consolidated account statement (CAS) issued by NSDL or CDSL, which will consist of transactions and holdings in your demat account and MFs held in statement of account form. This is to be issued at least half yearly, and if there are any transactions, then in the next month. So, you need not move to a demat format for MFs just for a consolidated view of holdings across stocks and funds.

Things To Watch Out For
If you opt for a demat holding of your MF investments, remember that there is a cost attached to demat transactions-it is nominal and differs for each DP. Also, the redemption process for MF units held in demat format can take up to 2-3 days; you can either directly fill a form at your DP or do this through your broker. You can also convert demat units into a statement of account format and then opt for redemption, but this can take even longer. Also, the demat account holder's name and that of the MF investor must match. You can have a demat account of a jointly held MF, but then the demat too should be in the name of both the investors. Moreover, the sequence of first and second holders has also match. Given the recent changes such as CDSL and NSDL CAS and non-demat transactions through the stock exchanges, MF investors don't really need to open a demant account. Transacting in MFs without a demat statement is convenient and so far remains the preferred choice for majority investors.

In arrangement with HT Syndication | MINT

This story first appeared in November 2015.

This article was originally published on August 01, 2017.