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A demat account is a digital account available through depositories, whereby investors can hold their securities in a dematerialised or digital form. Investors can use it for multiple securities like equity shares, bonds, debentures, ETFs (Exchange Traded Funds), mutual funds etc.
Why demat accounts?
Before the evolution of dematerialisation, the records of stocks and securities used to be maintained in physical certificates, which posed safety and security problems. Over time, some paper certificates also may have worn out due to normal wear and tear.
Further, investors may have to take extra effort to find all investments in one place, as there was always a possibility of the physical certificates getting misplaced. When such securities had to be transferred, the physical share certificates were sent to the Registrar through the post with a duly-filled transfer form. In case the signatures on the transfer form did not match, the transfer request was cancelled, and thus, there used to be a significant risk of default in such cases.
All these concerns regarding safety, security and transfer got addressed with the introduction of demat accounts, as it entailed the following benefits:
- Centralised records in digital form – The records of multiple securities could be maintained in a single demat account, facilitating easier management and tracking of investments.
- Faster delivery of investments - The transfers in demat accounts can from one account to another in a short period of time, thereby facilitating quicker delivery of securities and minimising the risk of default.
- Better security – With records being maintained in digital form, the risk of misplacing or damaging physical certificates gets nullified. As such, having a demat account may provide better security for investments.
How does a demat account work?
There are two depositories in India – NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited). The demat account needs to be opened with any of these two depositories. These depositories have further empanelled several agencies as Depository Participants (DPs), the interface between the investor and depositories.
The investor must interact with DPs for all service-related issues and correspondences regarding the account. Opening a demat account is akin to having a banking account, wherein one gets access to their investments in a single place. To transfer the securities to another demat account, one must provide a duly-filled DIS (Delivery Instruction Slip) to the DP for executing the transfer. The DIS booklet looks like a chequebook, and the investor must enter the demat account details of the receiver for the DIS to be executed seamlessly.
Do mutual funds require a demat account?
A demat account is an online account to hold securities in a 'dematerialised' or digital form. While mutual fund investors can opt to hold their securities in demat accounts, it is not mandatory to have a demat account to buy mutual funds. An investor can hold mutual funds either in demat accounts or under investor folios. However, a category of mutual funds called exchange-traded funds (ETFs) are usually purchased over a stock exchange and would hence require a demat account.
Pros of demat accounts
When an investor opts to hold their mutual fund investments in a demat account, it helps them consolidate all mutual fund investments in a single demat account. If the investments are held in investor folios, the mutual fund investments remain scattered in different folios across different mutual fund houses. The investors may need to maintain records for investments spread across different mutual fund houses. Maintaining separate login details for website accounts for each mutual fund house may be a challenge for some investors. It may also lead to procrastination, especially in managing and reviewing the investments, and this is where holding mutual fund investments in demat account may help.
Cons of demat accounts
Websites of fund houses and Registrar & Transfer Agents (R&TAs) generally provide investor-friendly statements like capital gains statements, periodic account statements, etc., which might be difficult when investments are held in demat accounts. This is because demat account statements only provide quantitative transaction statements, while the cost-related information of such investments needs to be fetched from respective contract notes. As such, investment records might need further action to be organised, even when the investments themselves get consolidated and organised in demat accounts. Further, there is an additional cost associated with demat accounts, which includes annual maintenance charges and other ancillary costs.
How to invest in exchange traded funds through demat accounts?
One can invest in exchange traded funds (ETFs) through demat accounts, just like one purchases shares. As such, one can place a buy order on stock exchanges for the specified ETF scheme. Stock exchanges (BSE & NSE) have provided separate mutual fund platforms to enable investors to place orders for mutual fund units seamlessly.
One generally places an order for ETF units on stock exchanges through trading accounts, and such an order may be a market order or limit order. A market order means that the order will get executed at the prevailing market price, while a limit order means that the order will only be executed if the specified target price is touched. In case the target price is not reached, the order gets cancelled at the day end and the investor may need to place a fresh order again.
The final word
While mutual fund investing is flexible for the investors to hold mutual fund units across demat accounts or investor folios, choosing between the two is purely a personal choice, depending upon the convenience and preferences of the investor.
Disclaimer-
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
