When you buy mutual fund units, you can choose between getting your units in a statement of account or in your demat account. Both forms are digitized; there are no paper certificates. But the demat units are held in your demat account with your depository participant.
Transmission of mutual fund units (say, transfer of mutual fund units to a legal heir of a deceased unitholder) is easier with demat units. All the legal heir needs to do is open a new demat account in her name, submit the death certificate and a copy of the deceased unitholder’s Will and other required documents, and get the units transferred to the new demat account. If you hold units in SOA format, you would need to submit the documents to as many RTAs and handle your various funds’ back office operations.
If you hold units in demat, you also cannot do a systematic transfer plan. Some brokers (on their own) offer systematic withdrawal plan, but not everyone. Systematic investment plans and switches (between schemes of same fund house), though, are permitted in demat holdings.
Liquid funds are available in demat mode, but you cannot buy and sell the units in a single day. Many large investors park money in a liquid fund for overnight duration only. If you buy liquid funds before 2pm, you get the day before’s net asset value. And if you sell the same units before 3pm on the same day, you will get money the next day, at previous day’s (today’s) net asset value. In the demat mode, the crediting of units and the subsequent debiting of units takes time since it happens at the depository participant’s end.
The operation is tedious for demat holdings, as units and money go through the stock broker’s pool account. The broker has to reconcile the accounts on a daily basis to segregate investors’ units and monies on a daily basis.
Pros of keeping Mutual Funds in Demat Account
If you have a lot of financial holdings, a combined statement is useful.
It’s easy to keep a eye on your investments on daily basis.
In comparison to mutual funds, where the nominee would have to submit a form to each fund house where the units were kept, the demat alternative option is much more simplistic. In case of any misfortune if you have investments in stocks, debentures, and mutual funds and want to make the transmission process simpler for your nominee in the event of your mortality than transferring the MF units to demat will be the best option.
There are no exit loads on off-market transfers of units.
Cons of keeping Mutual Funds in Demat Account
Demat account annual maintenance changes are an extra cost for you if you don’t have any other investment. It will cost you from 300 to 500 in normal cases.
Due to the addition of middlemen such as a depository and a broker, the transaction for unit during buying and selling will take longer time.
Mismatches in the names of the Demat and bank accounts may cause the withdrawal process to be delayed.
A systematic transfer/withdrawal scheme from demat units is not practicable.
Financial investments (demat and SoA) are presently sent to investors on a regular basis in combined pattern.