Why is Demat Account not Necessary for Mutual Fund Investment?

Mutual funds are often regarded as one of the safest investment schemes since it is professionally managed and optimally diversified to combat the risks involved. For investing in mutual funds, you may either open a Demat account or buy directly through an AMC, an independent financial advisor, CAMS, or a nearby bank."Should I open a Demat account for investing in mutual funds?" is one question that often bothers investors, especially first-timers. A Demat account is not necessary for dealing with mutual funds and may be easily avoided if you are only investing in mutual funds and not involved in direct stock trading.Let’s look at some of the common queries of mutual fund investors about having a Demat account.

• What is a Demat Account? A Demat account is an account that allows you to hold securities and shares that are dematerialized (converted from physical to electronic form). Hence, it is easy to sell, purchase and manage all the securities through this single dashboard.
• Can I Invest in Mutual Funds Without a Demat Account? Though you may invest in mutual funds through a Demat account also, it is not a mandatory requirement. If you are planning to invest only in mutual funds and not in other securities, shares, or bonds, it is advisable to avoid opening a Demat account.
• Why is a Demat Account Unnecessary for Mutual Fund Investment? When you invest in a mutual fund, you are assigned a folio number similar to an account number that can be used to track your investment status.

Apart from this, the below reasons also make a Demat account unnecessary for mutual fund investment :

• You need to pay a yearly maintenance fee for holding a Demat account that may add up to your expenses and lower the profit margins.
• You can only invest in regular mutual funds (and not Direct funds) through a Demat account, and hence extra commission is charged by the intermediaries that may sum up to a huge amount in the long run.
• NSDL regularly sends a consolidated statement for all the mutual funds held by an investor. It is similar to a Demat account that shows all the investments in one place.
• A Demat account allows you to add only one nominee to your account. If you wish to add multiple persons to your investment or jointly hold it, it is not possible with a Demat account.

A Mutual fund investment can be made easily without a Demat account in the following ways:

• Directly through the AMC by visiting their website or their nearest office. You just need to submit the application form and required ID proofs for KYC compliance.
• By contacting any nearby bank and the relationship manager who can help you in the investment process.
• By approaching an independent financial advisor or offline distributors that can help you in the investment process in exchange for a certain fee amount.
• There are many third-party portals available online that can help you in the mutual fund investment. They also provide a common dashboard for all your investments so that you can easily manage all your funds in one place.

If you already have a Demat account and wish to invest in mutual funds, you can do it anyways. But if you are doing it for the first time and want to keep your focus only on mutual fund investments, it is advisable to avoid opening a Demat account. The mutual fund investment process is very much streamlined now, which allows you to easily and efficiently manage your funds without a Demat account.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.