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When fund houses came up with an option to allow investors to dematerialise their holdings, it was considered to be an excellent idea which may gather a lot of momentum. However with the passage of time this option’s heat got fizzled in the air. If this was an excellent idea, why did it not gain popularity ? Well, this article will focus upon the demat option and its pros & cons so that investors can take an informed decision on the mode of holding their mutual fund investments.

Dematerialising (Demat) of Mutual FundsDemat

Demat is analogous to a bank account. Instead of holding cash in your pocket and in your safe deposit lockers, you may prefer it to be stored in a bank account and consider a bank statement as your cash balance. In return the respective bank will provide you a trusted mechanism to access and transfer your cash on demand.

Essentially it means that you have parted away from your physical cash and made it digital which adds to safety, transparency and mobility.

Initially demat started with Share trading and was considered to be a revolution as it immensely enhanced the speed, efficiency and security around share trading. Share certificates were originally required to be posted physically from one corner of the country to the other. This often resulted in lost certificates and delayed settlement times. With demat, share transfers can now be completed within 3 days compared to over 15 days earlier.

With mutual funds, the story is a bit different. Mutual fund statements received by investors are sufficient to transact in the respective funds. Even if an investor does not have a statement and knows his folio number in the fund house, a simple form can be filled to transact. This is because the units of mutual funds are already held in electronic form by the mutual fund houses.

Why was Demat Option Invented ?

The rationale behind bringing the demat of mutual funds were :

Consolidate Position of Investments

If you have invested in multiple fund houses, you would have realised that your investment in mutual funds are represented by different account statements from each of the fund house. There was a missing functionality whereby a consolidated view could be presented to an investor for all of his mutual fund investments in one place along with other investments like equity shares, bonds. By dematerialising your mutual funds, you could see all mutual fund investments along with your other demat investments in one place.

With recent introduction of CAS (Consolidated Account Statement), I believe the requirement of consolidated investor view for all mutual fund investments is some how addressed and hence just having a demat account for consolidating all of your funds in one place is not a big value add.

Simplifies Nomination Process

Once dematerialised, nomination on demat account is applicable on the mutual fund balances. While this is a welcomed functionality, I have come across several investors who want to have seperate nominees for different funds. Hence if investor’s demat account has a nominee as ‘A’, all mutual funds in the demat account will have a nominee ‘A’. If an investor wants a different nominee or wants 50% of units to be nominated to ‘B’, then he either would need to get the demat nominee changed (which will affect all of his investments in the demat account) or open a seperate demat account (which would add to the costs)

Change of address

The address linked to a demat account will be affected on your units in the account. So by just changing the address in your demat account you could change the address on all mutual funds in the account. While some industry veterans have highly welcomed this functionality, I believe that this feature has always been there since the introduction of KYC norms. If you update your address on a KYC form, all mutual fund houses would get their address fields changed based upon the address in the KYC form.

Disadvantages of MF Dematerialisation

Now let me enumerate some of the cons of dematerialising your mutual fund units which really negates the small list of advantages brought in by demat of funds.

Extra Costs – Demat Charges

Demat in India doesn’t come for free ! It can be as minimum as free for the first year of account opening to over Rs. 500 per year. Just maintaining a demat account with its recurring annual charges doesn’t make sense as it doesn’t bring in any structural advantages. Further, we in India love to invest in joint names and can be really creative. For example, Mr. A and his family of B, C & D will probably have investments in name of A and A&B and B&A and B and A&C and C&A and so on. Every combination of investment would require a seperate demat account further adding to the cost.

Transaction Fees

Investors were happy to hear that the entry loads were discontinued. Further, you would notice that after holding your investments for 1 year, the exit load is also not applicable. For liquid funds, you may find no entry and exit loads. However, that all remains true for transacting directly with a mutual fund via the usual route. If you want to go via the demat route, you have to buy and sell your mutual funds via a stock broker or via your Demat company. Each of them would charge you a transaction fees. Happy to pay a fee for every time you transact ? If yes, then why don’t you pay that fees to your distributor or financial advisor and I am sure that they would go an extra mile to make sure that you are getting an excellent ongoing service.

Lack of comprehensive dealers in MFs

In order to transact in dematerialised mutual funds, you need stock brokers who provide you an option to trade in your required fund houses. While this should sound as an obviously available option, unfortunately the reality is that there are not many stock brokers around who would provide you with an extensive trading experience in mutual funds owing to lack of investor interest towards investing in mutual funds via demat option. Hence do check with your stock broker before dipping into to the demat wagon.

Liquidity Issues

Value of anything listed and traded on a stock exchange is determined by the presence of buyers and sellers. One of the advantages of directly dealing with a fund house (non-demat mode) is that you can visit any of the nearby fund house office / CAMS or Karvy and sell your mutual fund investments at their actual NAV. You would very very rarely come across a situation whereby they refuse your application. On the contrary, if there is no buyer on the stock market, you would not be able to sell your mutual fund units held in demat mode – making a very liquid investment a perfectly illiquid investment? Or if you are unlucky, you may get a buyer who may not want to pay you the actual NAV for your MFs. And if you are in a hurry, you will probably bow down to your selling pressure and accept what ever price the buyer is ready to pay.

Conclusion

While I am not refuting the fact that the option of demat is completely useless for mutual funds, but I am finding it hard to justify additional advantages it brings to retail investors. Each of the advantages have an alternative which is good enough to justify the requirements of a long term investor. Demat was a very required option for share trading. However, all the features of demat are already present in mutual funds in their normal form. Would investors want to add an additional demat wrapper to something which is already in electronic form ? This is a thumbs down from my end atleast. What would be your view on it ?

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One Response to Mutual Funds in Demat Form

  1. bemoneyaware says:

    So Demating a mutual fund does not offer much advantage. Good information but I have following doubts
    How does one go for demaating mutual funds?
    Once the mutual funds are demated can we un-demat them?

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