Direct Mutual Funds: Demat Account Investment Guide

Investing in mutual funds is considered one of the safest investment strategies due to the level of diversification it offers. While a dematerialization (DEMAT) account is not required to purchase or redeem mutual fund shares, it has several advantages. A DEMAT account enables an investor to buy mutual fund shares through the electronic transfer of funds without a broker. It also eliminates the need for physical fund certificates when redeeming shares.

To open a DEMAT account, an investor must select a depository participant, submit an account opening form with the necessary documents, and undergo in-person verification.

This article will explore the process of investing in direct mutual funds through a DEMAT account, including the steps to open a DEMAT account and the advantages and disadvantages of using one.

Advantages of a Demat account

Demat accounts were introduced in India in 1996, shifting the country's trading system to an electronic format. Here are some advantages of using a Demat account:

Safety and Security

The Demat account offers safety and security to investors. When financial assets were held in physical form, there was always a risk of loss or theft of the share certificates. Demat accounts eliminate this risk, offering a safer and more secure way of holding shares.

Faster and Smoother Settlements

Before dematerialisation, the settlement of trade used to take 14 days due to the physical movement of paper shares. With a Demat account, the settlement cycle has reduced to 2 working days, saving investors time and effort.

Easy Transmission

In the unfortunate event of the Demat account holder's death, the ownership of assets can be quickly transferred to the next of kin. This is possible by either opening a joint Demat account or adding the next of kin as a nominee.

Better Liquidity and Monetisation

Demat accounts facilitate the easy liquidation of assets. It is simple to sell or take a loan against shares, mutual funds, etc., when held in a dematerialised form.

One-Stop Storage for All Assets

A Demat account stores all your financial assets, including shares, debentures, bonds, exchange-traded funds, and unit-linked insurance policies. This makes maintenance and tracking easier, especially when filing taxes, as all records are maintained in one place.

Simplified Accounting and Management

When financial assets are held in Demat form, all transactions are automatically accounted for by the depository participant, making reconciliation and management of accounts extremely simple.

Central Point for Updating Information

With a Demat account, you can update your information, such as a change of address, without having to reach out to multiple companies. Simply inform your depository participant (broker) of the change, and they will update your KYC records.

How to open a Demat account

A Demat account is a dematerialized account that allows you to keep your shares and assets electronically. It consolidates an individual's interests in stocks, government securities, exchange-traded funds, bonds, and mutual funds.

Online Method:

• Choose a Depository Participant (DP) website that is safe and secure.
• On the DP website, select the 'Open Demat Account' option and follow the on-screen instructions.
• Fill out the online form with your personal details, such as your phone number, email address, etc.
• You will receive a One Time Password (OTP) on your registered mobile number.
• Submit the required documents, including your PAN card, address proof, identity proof, and bank details.
• Complete the E-KYC process by digitally authenticating your KYC information.
• After verification, you will receive your Demat account number and login credentials.

Offline Method:

• Choose a Depository Participant (DP), which can be a licensed bank, financial institution, or broker.
• Submit a duly filled account opening form with the required documents, including passport-sized photos, proof of identity, and address.
• Sign and submit a contract that outlines the requirements, limitations, and rights related to having a Demat Account.
• Once the account is opened, the DP will provide you with a unique Client ID and instruction sheets for availing depository services.

It is advisable to select SEBI-registered intermediaries to open your Demat account. Additionally, you can opt for 2-in-1 or 3-in-1 accounts that act as both trading and Demat accounts, providing added convenience.

Investing in Mutual Funds without a Demat account

A Demat account is not required to invest in mutual funds. There are several alternative ways to invest in mutual funds without a Demat account.

Asset Management Company (AMC)

You can invest in mutual funds by visiting the AMC website directly. However, this method only allows you to invest in the mutual funds of a single AMC, which is generally not recommended as it prevents diversification.

Offline Distributors

There are various offline distributors through which you can invest in a host of mutual funds. Upon investing, you will be given a physical paper acknowledgement of your investment.

Online Distributors

Online distributors offer a completely paperless experience with complete tracking and related controls. You can also track all your investments in one place, making it easier to decide when to redeem.

Banks

Many private banks offer their account holders the option of investing in mutual funds through their online banking services.

Brokers

If you wish to invest in stocks, mutual funds, bonds, and other such instruments, it is convenient to use a broker as this allows you to see all of your investments in one place.

It is important to note that while a Demat account is not necessary to invest in mutual funds, there are several advantages to having one. A Demat account allows investors to buy mutual fund shares through the electronic transfer of funds without the assistance of a broker. It also eliminates the need to hold physical fund certificates when redeeming shares.

Investing in Mutual Funds with a Demat account

A Demat account is a digital account that holds your investments in dematerialised form. In other words, it stores your shares, bonds, mutual funds, and other securities electronically, making investing safer and more convenient. While a Demat account is not mandatory for purchasing mutual funds, it offers several benefits that make it a worthwhile option to consider.

Benefits of Using a Demat Account for Mutual Funds

• Centralised Holding: A Demat account acts as a central repository for all your investments, including mutual funds, stocks, bonds, and exchange-traded funds. This makes it easier to track and manage your portfolio.
• Enhanced Security: Demat accounts provide increased security for your financial transactions. The electronic nature of Demat accounts eliminates the risk of physical damage, loss, or theft of paper certificates. It also reduces the chances of fraud and minimises errors associated with manual processes.
• Convenience and Accessibility: With a Demat account, you can buy, sell, or redeem mutual fund units online without dealing with physical certificates or extensive paperwork. The online platform offers accessibility and enables faster transactions.
• Nominee Facility: Demat accounts allow you to nominate a person who can smoothly inherit your mutual fund units in the event of your demise.
• Automatic Updates: Your Demat account is automatically updated whenever you transact, providing you with real-time information about your investments.

Steps to Invest in Mutual Funds with a Demat Account

• Select a Depository Participant: Choose a depository participant (DP), which acts as an intermediary to help you access central depositories like NSDL or CSDL in India. Banks, brokers, and financial institutions often function as DPs.
• Submit Documents: Provide the necessary documents for opening a Demat account, including identity proof, residence proof, passport-size photographs, and a PAN card, which is mandatory.
• Complete the Verification Process: An in-person verification of the submitted documents is typically required. Keep the original records handy during this process.
• Receive Account Credentials: Once your application is approved, you will receive your Demat account number and password, enabling you to access your account online.
• Choose a Mutual Fund: Decide on the mutual fund you want to invest in, considering factors such as your investment goals, risk tolerance, and the fund's performance.
• Purchase Mutual Fund Units: After selecting the mutual fund, you can purchase the units through your Demat account. You may need to fill out certain paperwork, either offline or online, before applying for the mutual fund units in dematerialised form. Ensure that the details provided match the information disclosed to your depository participant.
• Monitor Performance: Demat accounts and registered depositories provide regular updates on your holdings. You will receive fund account statements, and depositories will share consolidated account statements detailing your mutual fund holdings.

Direct vs. Regular Mutual Funds

It is important to understand the difference between direct and regular mutual funds. Direct mutual funds are purchased directly from the fund company or asset management company (AMC) without the involvement of a broker or intermediary. On the other hand, regular mutual funds are bought through a distributor or broker, who provides advice and earns a commission from the mutual fund company. Direct mutual funds offer the advantage of lower expenses since there is no middleman involved, resulting in higher returns for investors.

Differences between online and offline investing

Investing in mutual funds can be done through both online and offline modes. While the online mode is undeniably more convenient, the offline mode is a good option for those who have reservations about investing online. Here are the differences between the two:

Online Investing

Online investing in mutual funds can be done through the following methods:

• Asset Management Company (AMC) Website: First, choose a Mutual Fund Scheme and then visit its official website. Open an account with the AMC, choose the "Direct" option under the "Plan Type", select the scheme and the investment option (Dividend or Growth), and provide investment details such as Systematic Investment Plan or Lump-sum. Verify the details and make the payment.
• Registrar and Transfer Agent (R&TA): Invest through a registrar such as KFin Technologies Limited or CAMS. Ensure that the Mutual Fund Scheme is registered with the registrar. The process is similar to investing through an AMC website.

Advantages of online investing include saving time, accessing various mutual fund schemes, and using the same KYC details for multiple investments.

Offline Investing

The offline method involves physically filling and submitting a Mutual Fund Form. Here are the steps:

• Visit the nearest office of the Asset Management Company (AMC) whose fund you have selected.
• Complete the Know Your Customer (KYC) process if you are not KYC compliant.
• Provide documents for in-person verification, including a self-attested copy of PAN and address proof.
• Submit a Common Application Form or SIP Form, and if choosing the SIP route, also fill out a NACH Mandate to allow auto-deduction of the SIP amount.
• Submit a cheque or demand draft in the name of the AMC for the desired investment amount.
• You will be allotted a folio number and receive an account statement.

A similar process can be followed at the local RTA office. However, offline investing requires physical visits to the branch and filling out forms for any actions such as redeeming fund units or stepping up the SIP amount.

Frequently asked questions