Do You Need a Demat Account to Invest in Mutual Funds?

You may have come across the term ‘Demat account’ when researching how to invest in mutual funds. Simply put, a Demat account is a digital account that stores financial securities in dematerialised/virtual format and allows you to trade the same in the share market.

While having a Demat account is mandatory when trading securities in the stock market, such is not the case for mutual funds. While most mutual funds do not have a prerequisite of having an account to invest, you cannot purchase Exchange Traded Funds (ETFs) without a Demat account. This is because they are similar to the securities traded in the stock market.

Learn more about Demat accounts, their functions, and how they can benefit you in the long run.

Advantages of Demat Account

Here are some of the key advantages of opening a Demat account for your investment objectives:

Lowered Risk of Losing Documents

Since the securities are stored online in a Demat account, the risk of losing or misplacing the physical documents pertaining to your investments is very low. Prior to Demat accounts, it was easy to falsify or forge physical copies of these documents. However, a paperless form of dealing with these can help ensure that no such issues prop up, thereby making for a smoother investing experience.

Cost-effectiveness

You can benefit from cost savings with a Demat account as having one online can do away with expenses such as handling and stamp duty charges. However, you may still be required to pay for brokerage.

Quicker Settlement Process

A major advantage of having a Demat account is that you can conduct all your transactions through it in an easy and hassle-free manner. Furthermore, the time taken to settle them is also much quicker, including transfer of ownership and payment clearance. Nowadays, most Indian stock markets feature a settlement time of T+1 (1 day) from the date of the transaction.

Common Place for Tracking Investments

You will be able to track all your investments through a single online portal with different types of Demat accounts. Additionally, you can view all statements pertaining to your mutual fund holdings from various schemes from the same account. This can make it easier to manage all your money, while also helping you make better investment decisions in order to get good returns.

Nomination Facility

A Demat account also allows you to choose a nominee to whom you can transfer your securities and other assets, in the case of your unfortunate passing. This can be done at any point in time and does not require the beneficiary’s permission. 

How Does a Demat Account Function?

While opening a Demat account, you will be required to choose between the Central Depository Services Limited (CDSL) and the National Securities Depository Limited (NSDL). These are the two primary depository institutions in India and they feature their own Depository Participants (DPs), who serve as the interface between the depositories and the investors.

Investors have to interact with their respective DPs for all correspondences and service-related issues pertaining to the account. While executing the transfer of securities from one demat account to another, you must produce a duly filed Delivery Instruction Slip (DIS) to your DP. This functions as a chequebook, and you are required to enter the receiver’s Demat account details for the successful execution of the DIS.

Utilise Demat Accounts to Invest in Exchange Traded Funds

Similar to purchasing shares, you can invest in ETFs via different types of Demat account. Exchanges such as BSE and NSE have ensured that different platforms allow investors to order mutual fund units in a simplified manner.

You can place orders for ETFs in stock markets via trading accounts, which can either be a market order or limit order. Here, market order refers to those ones getting executed at the current market price. On the other hand, limit order means that it will only be executed upon hitting the mentioned target price.

Therefore, if the target price is not achieved, then the order is cancelled by the end of the day, and you may be required to place a fresh order.

By opening a Demat account, you can get several benefits while investing in different securities. This can also help create newer avenues for investments and help diversify your portfolio. Don’t wait any further and get started with the Demat account opening process, today.

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