You can hold your MF units in two ways:
- Statement of Account (SOA)
- Demat Account
Under Statement of Account that you get from the AMC (the mutual fund house) or R&T agents (CAMS and Karvy), all your investments with the AMC are listed down. The Statement is merely for information purpose and is not any kind of legal document. You can think of it as your bank account statement. This has been the traditional way of investing mutual funds.
If you choose to units in Demat Account, you units are kept in demat account (just like your investments in equity shares).
For instance, you are purchasing units through MF utility, you can either hold units in demat account or in SoA form.
Is there any benefit in holding MF units in demat format? What are the pros and cons of holding units in demat account? Let’s find out in this post.
Benefit#1 Ease of Nomination
A benefit of holding MF units in demat account is the ease of nomination.
If you are investing through aggregator portals such as ICICIDirect or MFUtility, the nomination information is typically not passed to the AMC. So, if you check your Statement of Account, you will find nomination information missing.
Hence, you have to approach each AMC (you have invested with) separately and update nomination information. In case of change in nominee, you will again have to approach all the AMCs to update the information.
With a demat account, the nomination of the demat account will apply. In case of change, you just need to update details in your demat account.
Personally, I do not see this as too big a benefit. You will most likely not invest with not more than 3-4 AMCs. Moreover, it is a one-time effort.
The other way is to open folios under joint holding structure. So, if you want to invest in mutual funds with your spouse as the nominee, you can simply make him/her the joint holder in those investments. After your demise, your spouse automatically becomes the owner.
Point to Note: I am not too sure about the rights of nominee in case of MF units or demat account holdings. Is he/she the ultimate beneficiary post demise of the applicant or merely a guardian?
Benefit#2 Selling units in Closed Ended Mutual Funds
If you want to sell the units purchased in a closed ended mutual fund, then you have to sell it in the secondary market. Unlike units of open ended mutual funds, you cannot redeem units of a closed ended mutual fund whenever you want.
The AMC won’t buy it back before the lock-in period (scheme period) gets over. In that case, the only option available is to exit in the secondary market. Such schemes are listed on stock exchanges.
In this case, holding the units in demat format is useful. However, for you to sell, there has to be someone wants to purchase. There is hardly any liquidity in such schemes. If you can’t sell, what is the difference if you hold units in demat account or in SoA form?
In any case, I do not find the idea of closed ended funds very appealing. I have never invested in closed ended mutual funds and never intend to.
Your MF units are already in digital format
You do not hold a physical mutual fund unit certificate. Do you?
Your mutual fund units are already in digital format. When you invest in a mutual fund scheme, the Asset Management Company (AMC or the mutual fund house) creates a folio for you. The units are allotted under that folio. Units purchased in the future can also be allotted under the same folio.
A folio is identified through a unique folio number. A folio number is unique in a particular AMC (and not industry wide). So, if you invest with a second AMC, it will allot you a different folio number.
By the way, you can open multiple folios with the same AMC and hence get different folio numbers.
The folio number is mentioned in the MF statement of account.
You are already holding units in digital format. No real benefit by dematerializing existing units and holding in demat account.
There is cost involved with holding MF units in demat account.
First, there will be annual maintenance charges. You have to shell out anything between Rs 250 to Rs 750 per annum as maintenance charges. However, if you are already investing in stocks, there is no additional cost for you since you can get MF units in the same demat account.
Apart from that, there is cost involved when you sell MF units from your demat account. HDFC Bank (a depository participant, DP) charges Rs 30 per redemption transaction. Additionally, there are depository charges on each redemption. NSDL charges Rs 4.5 per transaction while CDSL charges Rs 5.5. Service tax shall be extra.
You can look at detailed list of charges from HDFC Bank here.
Hence, if you are redeeming MF units worth Rs 5,000 from your demat account, you have to pay ~Rs 40 (including service tax). Almost 0.8% of the redemption amount. And for what? For holding MF units in demat account. This is atrocious. You pay nothing for holding MF units in folios. And those units are digital (electronic) too.
Do note these charges may vary across Depository participants. HDFC Bank is a depository participant. Other DPs may have different charges. Additionally, percentage impact cost will be lower if the redemption amount is larger. For instance, if the redemption amount is Rs 1 lac, the cost is 0.04%.
You get consolidated view of your investments in demat account
You do get a consolidated view of your investments (stocks, AMCs, bonds etc) in demat account.
Well, you can at least download a consolidated statement for all your MF investments (across AMCs) from CAMS or Karvy websites. Hence, you can get a consolidated view of your investments even without holding units in demat format.
A minor digression. Many distributors tell investors (who want to shift to direct plans) that they won’t be able to get a consolidated view of their investments if you choose to go direct. That is not true. You can download a consolidated statement from CAMS that will reflect all your MF investments (across AMCs, mode of investment).
Moreover, NSDL has recently started sending Common Account Statements (CAS) to all demat account holders. In the Common Account Statement, it not only lists out your investments in demat account but also your MF investments (mapped to your PAN).
Even those units which are not held in demat account are listed in the Common Account Statement. You don’t need to hold MF units in demat account to get the CAS.
In my opinion, there is no significant benefit of holding MF units in demat format. Your units are already digital and at little risk of loss. You will only increase transaction costs by keeping your units in demat format.
In case you have a different opinion, please let me know in the comments section.