Mutual Funds

Should you demat your MF holdings?

Satya Sontanam BL Research Bureau | Updated on May 09, 2021

There are some pluses, but the disadvantages outscore them

The convenience of keeping all of one’s investments under a single demat account — to get a complete view at one click — is appealing. This is possible in the case of one’s mutual fund holdings too. By converting your mutual fund (MF) units to demat form, you can view your capital investments (stocks, bonds and mutual funds) in a single platform.

All you need to do is submit a conversion request form, obtained from your broker or depository (NSDL or CDSL), for your existing investments. The asset management company, after verification, will confirm the conversion request.

But there are two sides to the coin. Here are the pros and cons.

Advantages

By having the MF units in a demat form, one can check all mutual fund holdings ( and investments in stocks and bonds) in a single window. Investments and redemptions for mutual funds and buying/selling of stocks can all be made from/to a single registered bank account. In case of new investments, there is no need to submit KYC (know your customer) with each fund house. Further, any changes to the basic details provided, such as email ID and nomination, can be made once and this will be applicable for all the investments.

Most of these benefits are already available on platforms provided by MF aggregators such as Paytm Money.

The additional benefits in case of MF units available in the demat form are two.

First, investors can easily use MF holdings in the demat form to provide for any margin purpose in case of trading. While the MF units held otherwise too can be used as margin, demat form reduces paperwork. Further, having all the investments in demat form makes succession easier in the unfortunate event of death of account holder. The nominee/legal heir just have to request transmission of the ownership to their account.

Disadvantages

One of the big disadvantages of having MF units in the demat form is that the investor cannot opt for SWP (Systematic Withdrawal Plan) or STP (Systematic Transfer Plan). Thus, it may hinder the investor in designing proper financial planning. For example, in an overheated stock market, one may plan to invest the lump sum in a debt liquid fund and opt for STP to an equity fund at regular intervals. This may not be possible if the liquid fund units are in demat form.

Any transaction with respect to the MF units with the broker attracts brokerage charges, in addition to annual maintenance charges, which may vary from broker to broker. While the brokerage charges could be minimal, this would be an added cost to the investor. Even if you want to purchase MF units under the direct plan, the transaction — as per experts — may be categorised under a regular plan. In a regular plan, purchase of units is through an intermediary. The broker through which the units are purchased would be an intermediary. This will increase the cost of investment as the expense ratio in case of regular plan is higher than the direct plan.

Further, if an investor decides to switch to another demat account, transferring of schemes with lock-in period may become a problem. All the holdings, such as stocks, MF units and bonds, generally get transferred to the other account. However, restrictions on transfer of units of ELSS (equity-linked saving schemes) during the lock-in period will apply as per the ELSS guidelines.

Thus, since the disadvantages outweigh advantages, you may not be better off converting to demat form.

Published on May 09, 2021

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