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

August 22, 2023 Mutual Fund

Among the diverse investment choices available, mutual funds stands out as the favoured option for most investors. Investing in mutual funds is the best way to diversify your assets and have experienced fund managers pick the securities for your portfolio.

[Read: How to Choose Mutual Funds For Your Investment Portfolio]

It is a highly flexible investment option that can cater to different investors’ requirements, such as building wealth, providing a source of regular income and fulfilling their financial goals. Mutual Fund schemes invest in a variety of asset types, including stocks and bonds, depending on the category.

However, many investors may not be clear if they require a Demat Account to invest in mutual fund schemes.

What Is a Demat Account?

A Demat Account is an online account in a ‘dematerialised’ or digital form that you can use to hold securities. Debuted in 1996 and over the intervening two decades, Demat Account has greatly expanded the availability of securities ownership to a much wider range of investors in India.

Demat accounts holds electronic records tracking the ownership of investor’s tradable assets. A Demat Account can be used to hold multiple types of securities such as stocks, bonds, mutual funds, etc. Moreover, it is easy to use and offers you convenience while investing.

Let’s take a closer look at the functioning of a Demat Account and whether investment in mutual funds requires a Demat Account…

How Does a Demat Account Work?

The National Securities Depository Limited (NSDL) and the Central Depository Services (India) Limited (CDSL) the depositories in India provide Demat Accounts. To facilitate the holding and transfer of investment units, the depository participants, such as banks and brokers, act as intermediaries between depositories and investors.

When you open a Demat Account, you receive a linked trading account which has a unique login ID and password to buy and sell shares. You must sign in to your trading account that is connected to your bank account in order to buy or sell a certain stock.

When ‘buy’ or ‘sell’ orders are made in your trading account, your Depository Participant (DP) promptly passes them to the stock market.

If the stock exchange receives an order to ‘buy’, it searches for sellers who want to sell the amount of the same share and instructs clearance houses to debit the seller’s Demat Account and credit the buyer’s Demat Account with the specific volume of shares. Buyers and sellers can hold Demat Accounts at different depositories.

Do You Need a Demat Account for Mutual Funds?

It is not necessary to have a Demat Account for investing in mutual funds. The only mandatory requirement is to complete the Know-Your-Client (KYC) formalities. Once you register your KYC with AMC or designated intermediaries, you need not re-submit the documents for future investments.

Mutual Fund institutions or Asset Management Companies (AMCs) do not require investors to use a Demat Account to buy mutual funds. It is important to know that a Demat Account is only mandatory for investing in stocks and it is optional for other securities.

The stock market and our daily lives have both been effectively altered by technology from the time when dealers screamed out stock prices to be bought and sold. Mutual fund trading has been made simpler with Demat Account.

A Demat Account for Mutual Funds is not required, despite the fact that it is a good trading tool and prudent if you want to invest in mutual funds.

3 Simple Ways to Invest in Mutual Funds:

You can invest in Mutual Funds without using a Demat Account for mutual funds in various ways –

1. Directly Through an AMC Or Fund House

One can directly invest in the mutual funds of the respective AMCs or fund house through their official website. Investing is as simple as scrolling the AMC’s website and selecting the funds you would like to invest in.

Earlier, it was required to physically submit your application with your PAN card and KYC documents at the AMC’s branch. However, now most of the AMCs offer a fully online process provided the investor is KYC compliant.

Once your application is approved, the company will provide you with a PIN and folio number that you can use to manage your investments. The process may not seem complex, but if you invest in mutual funds of multiple AMCs, you will have to carry out this process individually every time you invest in a new mutual fund scheme.

[Read: Are You Investing in the Right Mutual Funds? Think again!]

2. Mutual Fund Distributors (Online And Offline)

There are several online and offline mutual fund distributors that provide options to invest in mutual funds. You would receive your investment acknowledgement in a physical format from offline distributors.

As opposed to this, online distributors provide a complete virtual investing experience. They curate all your investment activities in one place for easy and efficient use.

These mutual fund distributors have also come up with online investing applications (apps); for this, you will have to download the particular distributors’ app. However, you have the advantage of being able to use a single account to manage all your Mutual Fund schemes.

However, it is important to verify the provider’s authenticity before investing any money to avoid getting scammed. You should also check if the portal is approved by your bank for NetBanking.

3. Net Banking

Many private banks offer their account holders the option of investing in mutual funds directly through their online banking services. For instance, if an individual logs in to their netbanking portal, they will have the option to invest in mutual fund schemes of their choice.

Here investments in mutual funds made through the bank account will also reflect in the net banking services of the individual investor.

However, while you do not need the Demat Account to buy mutual funds, it could be beneficial to have one.

Here are some advantages of having a Demat Account:

• A Demat Account offers you a common place to hold all your investments like stocks, mutual funds, bonds, etc. This simplifies tracking and managing your money and making better investment decisions to reap good returns.
• You can avail of a single statement to review all your mutual fund holdings of different schemes and multiple AMCs in your account.
• Having an online Demat Account offers great accessibility, and you can carry out fast and seamless transactions as opposed to storing your investments in physical certificates or different for each AMC.
• You can add a nominee to your account to enable a smooth transfer of units to them in the unfortunate event of the sudden demise of the account holder.
• A Demat Account offers better security since all your information is safely stored. There is no possibility of physical loss or damage to important documents, certificates, etc. Moreover, using the account also minimises the chances of falling victim to theft or a scam.

[Read: A SMART Way to Select the Best Mutual Funds for Your Goals]

To summarise…

Previously, opening a Demat Account was necessary for investors who wanted to buy mutual funds through an exchange. But owing to technology, it’s now simple for investors in mutual funds to make investments without setting up a Demat Account.

Additionally, note that transaction fees and annual fees are associated with Demat transactions.

Considering all of these aspects, investing in mutual funds without a Demat Account is convenient. However, creating a Demat Account is now more of an option than a necessity for an individual investor. Online investing is a convenient and most popular method of purchasing mutual funds among investors.

These online mutual fund accounts provide information on an investor’s assets, including the purchase price, the quantity acquired, and the current value.

This article first appeared on PersonalFN here