Should I get a Demat Account to buy units in Mutual Funds?

No! You do not need demat account / trading account, to invest in mutual funds.

Intro💫

No! You don't need demat account / trading account, to invest in mutual funds.

Mutual funds are sold by AMC (Asset Management Companies) directly to you. RTA (Registrar and Transfer Agent) of the relevant AMC processes the transaction, and keeps records of your units purchase or selling.

It's already stored electronically, with legal ownership that it belongs to you.

For instance, if you buy units in SBI Bluechip fund, then SBI AMC would issue you units. And its RTA, CAMS, would be responsible for maintaining these transaction details as source of truth, when it comes to your holdings in the fund.

To Demat or not to? 🙇‍♀️

If you add demat on top of that, it'd create an extra layer. Now that extra layer is beneficial for you or not, would vary from person to person.

The following are the pros and cons of using Demat folios:

Upsides 👍

• Loan Against Securities(LAS): You can gain access to a variety of loans, predominantly from a bank, by offering the securities (like mutual funds) as collateral; that are maintained in your demat account. These securities can be pledged as a collateral for obtaining a loan from your bank.

• Easy Claim Process: Mutual Funds or stocks in demat are much easier to claim by dependents (nominee of demat) in the case of death. Direct plans with multiple AMC’s (fund houses) would otherwise mean multiple folios, which would be difficult to aggregate and claim.

Downsides 🥺

• Porting & Vendor lock-in: Demat folios (folios where your units are purchased through a broker in demat mode), don't let you easily port these into other platforms. In non-demat mode of holding (also known as Statement of Account mode, or SOA mode); your units are only with the RTA, and you can purchase through one platform (INDMoney, for example), and sell those units through another platform (say, MFUtility); while track your portfolio in a third platform (Kuvera or PayTM Money, for instance). You get best of all platforms, when you invest in SOA or non-demat mode. Compared to that, investing in demat mode means you must transact on those units, only via your broker.

• Extra Fees & Charges: Demat mode of holding also adds extra charges, in addition to usual charges of mutual funds like the expense ratio, for each transactions. Depository fee, annual maintenance fees for your demat account, withdrawal stamp duty etc. are examples of charges you'd typically incur, should you use demat account. For a full list of all fees, you should ideally check with respective broker.

If you are confused which one to choose, select the non-demat mode. You aren't limited by the platform in this scenario.

You can transact on your folio through any platform of your choice, track your holdings in any other platform of your choice.

If a platform doesn't offer a functionality (say, instant redemption from liquid funds, or creating new folio for tax optimizations on short-term withdrawals), you can directly use the web portal of the respective AMC to place that particular transaction in your folio.

It gives you a freedom so that you're not vendor-locked-in with your broker or platform.

• Presently, platforms like Coin, HDFC Securities etc. offer mainly Demat mode of holdings exclusively. So you might want to think through and understand these inconveniences before signing up on any of these.

• For updating the details like nominee or bank details etc., you can use MFUtility since it provides the opportunity to update the details across fund houses with a single application.