Do we need a Demat Account for Mutual Funds?

Finding the best brokerage rates is crucial for maximizing your trading profits. In India, online trading platforms offer competitive brokerage charges, but they can vary significantly.

Among various investment options, mutual funds are the most popular. Investing in a mutual fund is a terrific choice if you want a diverse portfolio of securities but wish to have professional fund managers choose the securities. You can invest in mutual funds via the official website or a Demat account. This article explores the need for a Demat account for mutual funds.

Why Demat accounts?

To address the question, is Demat account required for mutual funds? a Demat account is not strictly necessary to buy mutual funds, but having one can be beneficial. A Demat account for mutual funds offers several advantages.

With a Demat account, you can keep all your investments in one place. You can easily track and manage your money, making better investment decisions and reaping better returns.

●  Your account allows you to view all your Mutual Fund holdings across different schemes in one statement.

●  Online Demat accounts provide great accessibility. You can conduct fast and seamless transactions compared to storing your investments physically.

●  Demat accounts offer better security. Documents, certificates, etc., cannot be physically lost or damaged. The account also reduces the chances of becoming a victim of a scam or theft.

●  The nominee feature allows you to transfer units to a specific person if you pass away

How does a Demat account work?

Now that you know the answer to is Demat account required for mutual funds? let’s understand how a Demat account works. When you open a Demat account, you also receive a linked trading account with a unique login ID and password. This allows you to buy and sell shares. Once purchased, the shares are stored in your Demat account.

Buying or selling a particular stock requires you to sign in to your trading account linked to your bank account. Your Depository Participant (DP) immediately forwards 'buy' or 'sell' requests for a particular stock to the stock exchange once they are placed in your trading account.

If the stock exchange receives an order to 'buy', it searches for sellers who want to sell the amount of the same share and instructs clearance houses to debit the seller's Demat Account and credit the buyer's Demat Account with the specific volume of shares. A single trade in the stock market works like this.

Buyers and sellers can hold Demat Accounts at different depositories.

Ways to Invest in Mutual funds

Up to now, we’ve covered basic questions readers often ask such as is Demat account required for mutual funds? and Do we need Demat account for mutual funds? Now, let's explore how you can invest in mutual funds. You can invest in mutual funds without using a Demat account for mutual funds in various ways.

1. Broker

To trade on the stock exchange, brokers provide Demat accounts. For investors who wish to invest in various investment avenues, such as mutual funds, stocks, bonds, etc., a Demat account is recommended because it allows you to monitor all your investments in one location. There are annual maintenance and transaction fees associated with Demat accounts, which may vary from broker to broker.

2. Asset Management Company

On their official websites, AMCs offer mutual fund investment options. Investing is as simple as visiting AMC's website and selecting the funds you would like to invest in. Afterwards, you must submit your application with your PAN card, KYC documents, and a check at the AMC's physical branch. You can manage your investments once the company approves your application and provides you with your PIN and folio number.

Investing in Mutual Funds of different AMCs may appear simple, but you'll have to go through the process individually every time you make a new investment.

3. Offline and online distributors

There are several online and offline distributors where you can invest in mutual funds. You would receive your investment acknowledgement in a physical format from offline distributors. As opposed to this, online distributors provide a complete virtual investing experience. They curate all your investment activities in one place for easy and efficient use.

4. By net banking

Many private banks offer their account holders the option of investing in mutual funds through their online banking services. Your net banking will show the financing you've done through a bank.

Is Demat account required for Mutual Funds?

Technology has revolutionised our daily lives and the stock market. There have been many changes since the day when traders shouted prices for stocks for buying and selling. A Demat account is a place where you hold all your shares electronically or dematerialised. A Demat account holds all your investment certificates, such as bonds, government securities, mutual funds, and shares. Demat account has also simplified mutual fund trading.

Even though a Demat account for mutual funds is a great trading facilitator and wise if you intend to invest in mutual funds, it is not a necessity.

Mutual Funds and Demat Accounts

Mutual funds are a way to invest in a mix of stocks, bonds and other securities. Instead of buying each investment separately, they pool your money with other investors and let professionals manage it for you.

In the past, when you invested in mutual funds, you would receive physical certificates for your units. Now, most people use demat accounts to manage their mutual fund investments. Here's why using a demat account can be beneficial:

1. Convenience: With a demat account, you can easily buy, sell or redeem your mutual fund units online. It means you don’t have to deal with physical certificates or paperwork.

2. Transparency: A demat account gives you a clear, consolidated view of all your investments including mutual funds and other securities. This makes it easier to track your investments and see how they are performing.

3. Access to Credit: If you need a loan or credit, you can use your mutual fund investments held in your demat account as collateral. This can be a handy option if you need quick access to funds.

Pros of Demat Accounts

The pros of Demat accounts include:

●  The process of holding and transacting securities in Demat accounts is convenient and hassle-free because securities are stored electronically.

●  By holding securities electronically instead of physically, they have greatly reduced the chances of forgeries, thefts, and fake securities.

●  The instant transfer of securities is also possible with Demat accounts. Therefore, a trader can transfer or trade securities as soon as he sees a favourable opportunity.

●  Using a Demat account, you can buy or sell a single share.

●  With a Demat account, you can open an account online and update important account details, such as changing your address, without contacting multiple firms.

●  Demat accounts allow you to hold a wide range of securities, such as equity and debt investments, mutual funds and gold ETFs.

Cons of Demat Accounts

The cons of Demat accounts include:

●  Among the costs associated with Demat accounts are account opening fees, transaction fees, custodian fees, and annual maintenance fees.

●  Having access to your Demat account online and via any Internet device may lead to frequent trading. With the ease of trading from anywhere, you may become inclined to buy and sell continuously, which could adversely affect your wealth creation goals. Furthermore, you may invest in short-term trading rather than long-term investments.

●  You do not need to be a tech expert to open a Demat account. You must, however, acquire skills such as monitoring, transacting, tracking, and operating the account. For that, you would need to learn some tech skills.

Advantages to using demat account for mutual funds

Choosing a demat account for your mutual funds has some great benefits compared to holding them in physical form:

1. Unified Account: You can manage all your investments like stocks, bonds, ETFs and mutual funds in one place. This makes it easier to see how your portfolio is doing and make financial decisions.

2. Real Time Tracking: With a demat account, you can see the current value of all your investments and track them easily, even if you have mutual funds from different companies.

3. Convenience and Security: Transactions are done online, which is both fast and secure. You avoid the risk of physical paperwork being lost or stolen. Plus, your dividends are automatically deposited into your bank account.

4. Automatic Nominee Update: If something happens to you, the transfer of your mutual fund units is streamlined because your demat account nominee also covers your mutual fund holdings.

5. Easy Updates: Any changes to your contact or bank details in your demat account will automatically be updated in your mutual fund records.
 

Demat Account Charges for Mutual Funds

When you open a Demat account with 5paisa for your mutual funds, here’s what you get:

•    You don’t have to pay anything to open your Demat account.
•    You need to pay account maintenance charges (AMC).
•    You’ll receive free text message updates about your account activity.
•    You can add a nominee to your account at no extra cost.
•    There are no hidden fees what you see is what you pay.
•    You’ll get monthly statements about your transactions and holdings at no charge.
•    You can easily view your securities in both CDSL and NSDL Demat accounts online.

Conclusion

Previously, mutual fund purchases through exchange required a Demat account. Now, mutual fund investors don't need Demat accounts. Using net banking, you can easily purchase mutual funds. For many investors, it is the preferred method of purchasing mutual funds.

Additionally, there are transaction fees and annual fees associated with Demat transactions. With all these factors in mind, investing in mutual funds without a Demat account is convenient.