Should You Hold Mutual Fund Schemes in Demat Form?

Are you looking to invest for the long term to attain financial goals? Do you seek inflation-beating returns over time even as retail inflation soars? You could invest in equity mutual fund schemes that have the potential to outperform inflation and help you reach critical financial goals. However, you can hold mutual fund schemes in your Demat and Trading Account or the Statement of Account (SOA) format. Should you have mutual fund schemes in the Demat Form?

How can you hold mutual fund units?

You can hold mutual fund units in your Demat and Trading Account similarly to shares. However, you can also have your mutual fund units in the Statement of Account Format. 

Suppose you hold mutual fund units in your Demat and Trading Account with a Depository Participant (DP). In that case, you enjoy the convenience of transacting in stocks, mutual funds and other financial products in one account. 

However, the Statement of Account (SOA) is an improvised physical holding method. It is a statement issued by Asset Management Companies (AMCs) which certifies the holdings of your mutual fund units. The AMC controls your mutual fund units if you opt for SOA, whereas the depository participant holds your investment in the Demat form.  

Should you hold mutual fund schemes in Demat Form?

You need a Demat and Trading Account to invest in Exchange Traded Funds or ETFs. Financial experts recommend that you have 5%-10% of your portfolio holdings in gold. For instance, many people invest in Gold Exchange Traded Funds or Gold ETFs to get the requisite gold holdings in their portfolios.

However, if you are not interested in ETFs, you can opt for the SOA format. You can get the apt gold holdings in your portfolio by investing in gold funds. It is a fund of funds scheme that invests in units of Gold ETFs. 

One of the most significant benefits of holding mutual fund units in the SOA format is you get an opportunity to transact through multiple means. For instance, you can easily place a redemption request for mutual fund units through the mutual fund website or even at the Registrar and Transfer Agent’s Office. Moreover, you can also transact through a mutual fund transaction platform such as the MF Utility. 

Investors holding mutual fund units in the Demat form must initiate their redemption request by logging into their broking account. Moreover, crediting mutual fund units to your Demat Account takes longer than crediting mutual fund units in the SOA format. 

You can invest in mutual funds through the systematic investment plan or SIP and hold units in your Demat Account similar to SOA format. However, you may not be able to opt for Systematic Transfer Plan and Systematic Withdrawal Plan if you hold mutual fund units in your Demat Account. 

What are the costs of holding mutual funds in a Demat Account?

You incur annual maintenance charges, custodian fees and other transaction charges when buying and selling mutual fund units through your Demat Account. It is in addition to the fund management charges of mutual funds. 

However, you don’t incur additional charges in the SOA format compared to holding mutual fund units in your Demat Account. Moreover, these additional charges can have a major impact on the long term wealth creation potential of your portfolio. 

You could invest in Direct Plans of Mutual Funds if you hold mutual fund units through the SOA format. It helps you save on commission expenses when investing in regular mutual funds. 

It would help if you opted for holding your mutual fund units in your Demat Account or SOA format as per convenience. It helps to analyse the pros and cons of both methods before commencing your mutual fund investments. In a nutshell, you must gauge your needs before choosing the appropriate format to hold your mutual fund units. 

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in