In this blog, we will be explaining what a demat account is and whether you need a demat account to buy mutual funds. We will also be explaining options other than demat account through which one can buy mutual funds units.
What Is A Demat Account ?
Demat accounts are digital accounts opened by an investors with a depository, which facilitate rapid and simple share trading/mutual fund trading. They are a crucial tool for maximising your wealth and safekeeping. Physical share/mutual fund certificates’ hazards and difficulties are eliminated. In India, opening a Demat account is a mandatory requirement if you want to invest in listed stock market you can invest in most mutual funds even without a demat account.
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Earlier share and mutual fund unit certificates were traded/transferred in physical form. However, it made the entire share trading /mutual fund trading procedure time-consuming and challenging to execute on short notice.
The National Securities Depository Limited (NSDL) was founded in 1996 to do away with these restrictions. Demat accounts, which could be used to store company shares and other securities digitally, were introduced. Before using a Demat account, you must convert any physical shares you own into electronic records. Commonly referred to as dematerialization.
Benefits Of Demat Account
You can hold a variety of investments with a Demat account, including bonds, equity shares, government securities, mutual funds, and exchange-traded funds (ETFs). Every time you purchase or sell shares or other securities your Demat account receives a credit or a debit, much like a bank account.
It not only gets rid of pointless paper work but also makes trading more efficient. Two depositories—National Securities Depository Limited (NSDL) and Central Depository Services Limited—maintain all Demat accounts in India (CDSL).
How Do Demat Accounts function?
A Demat account functions similarly to a savings account at a bank. The investor can keep securities in the Demat account of a depository participant (DP) affiliated with the NSDL or CDSL, just as one can store electronic cash in a savings account. The Demat account is credited when shares or securities are bought. When shares or other securities are sold, the account is, however, debited. It is a must to link your Demat account to your trading accounts in order to engage in equity and securities trade through it.
Documents Needed To Start A Demat Account
You need a few key papers in order to open a Demat account conveniently and without fuss. The required documents are listed below in a prepared list.
- Identification proof. For instance, a driver’s licence, voter ID card, PAN card, Aadhaar card, etc.
- Proof of residency: Registered lease agreements, driver’s licences, passports, power bills, rent receipts (if applicable), copies of insurance policies, gas receipts, landline phone bills, etc.
- Account statements or the bank’s passbook serve as proof of a bank account (must be no more than three months old).
- Paystubs or taxes as evidence of income (mandatory for the currency and derivatives segment).
- Fees and costs for Opening Demat account.
Depository services are not provided directly by NSDL or CDSL but by intermediaries called depository participants, its role is very much similar to that of a broker in share trading transactions. They charge a set amount, which may differ for each participant, to open these accounts.
Do You Need A Demat Account For The Purchase Of Mutual Funds
You have the option of receiving your mutual fund units in a statement of account (SOA) or in your Demat account when you purchase mutual fund units. There are no paper certificates; both kinds are digital. However, your Demat account with your depository participant is where you keep your Demat units (DP).
Which One You Ought To Choose?
If you routinely purchase exchange-traded funds (ETFs), purchasing mutual fund units through a Demat account makes sense. A Demat account is necessary because ETFs may only be bought and traded on stock exchanges.
Demat units make it simpler to transfer mutual fund units, for example, to a legal heir of a deceased unitholder. To transfer the units to the new Demat account, the legal heir simply needs to open a new Demat account in her name, provide the death certificate, a copy of the Will of the deceased unitholder, and other necessary documentation. If you own units in SOA format, you would need to manage the back office operations of your various funds and submit the necessary paperwork to as many registrars and transfer agents (RTAs).
However, please note that there are some cons too of Demat form. You cannot implement a systematic transfer plan if you have units in a Demat form. However, you can still undertake systematic investment plans (SIP) and swaps (across schemes of the same fund firm) using Demat units.
If you already had a Demat account and regularly purchased and sold equity shares of corporations, as well as bonds and non-convertible debentures, purchasing mutual fund units in Demat form made sense in the past. Your Demat account statement provided a consolidated view of all holdings in that situation. However, starting in 2015, regardless of whether mutual funds are dematerialized or not, you will receive a consolidated account statement (CAS) for all of your securities holdings, including those in mutual funds in SOA form.