Mutual funds are a convenient investment option that allows investors to create diversified portfolios and avail several benefits such as capital appreciation and diversified portfolios. However, many new investors are often unsure whether a Demat account for mutual funds is necessary for investing.
In this blog, we address the question, ‘Do you need Demat account for mutual funds?’ and evaluate the other ways of investing in mutual funds without having a Demat account.
Understanding Demat Account
A Demat account is an account that allows you to manage and trade your securities in a ‘dematerialised’ or digital form. Apart from mutual funds, this account helps investors hold different types of securities including stocks, bonds, and exchange-traded funds (ETF).
In the past, investors had to maintain physical certificates for their stock and security holdings, which came with risks such as loss, theft, and damage. To address these challenges, Demat accounts were introduced, eliminating the need for physical documents and streamlining investment management. In addition, it allows individuals to keep records of their securities in a consolidated manner. This facilitates convenient tracking of investments.
Is a Demat Account Required for Mutual Funds?
If you are considering investing in mutual funds, you might ask “Do we need Demat account for mutual funds?” The simple answer is no. A Demat account helps to track and hold the securities in a single channel.
Despite having a lot of benefits, it is not mandatory to buy and hold mutual funds in a Demat account. Investors can invest in mutual funds through Asset Management Companies (AMCs) or online portals without a demat account.
However, ETF is a mutual fund, which is purchased in a stock exchange and therefore requires a Demat account.
Benefits of a Demat Account for Mutual Funds
You can use the Demat account to buy and hold mutual funds. The benefits of a Demat account for mutual fund investment are discussed below:
- A Demat account allows you to hold all of your mutual funds schemes in one place, helping you to track and manage your money in mutual funds to get valuable returns.
- With a Demat account, you can assign a nominee to make a smooth transfer of your mutual fund units to another person in case of your untimely demise.
- A Demat account enables fast, hassle-free transactions, eliminating the need for cumbersome paper documents and ensuring a seamless investment experience.
- A Demat account reduces the risk of losing physical documents and certificates. It also minimises the possibility of fraud or theft.
- You need to use a single statement to see all the schemes of your mutual fund from your account.
Drawbacks of a Demat Account for Mutual Funds
While a Demat account offers convenience, it comes with certain drawbacks when used for mutual fund investments. Have a look at the drawbacks of using a Demat account for mutual fund investment:
- Additional Costs: You have to pay additional costs such as annual maintenance charges and other marginal fees.
- Limited Investment Options: Not all mutual fund schemes are available for purchase through a Demat account, restricting investment choices.
- Dividend Reinvestment Limitation: If you like to reinvest your mutual fund dividends to get compounding benefits, a Demat account may not work since it only provides a dividend payout option.
What are the Other Ways to Invest in Mutual Funds?
It is not mandatory to use a Demat account for mutual fund investments as there are numerous ways to purchase them. Below are the other ways one can invest in mutual funds:
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- Net Banking: Numerous private banks allow you to invest in mutual funds with their net banking services. You can simply purchase mutual funds and track your transactions in one platform without opening a Demat account.
- Asset Management Company (AMCs): You can consider using the official website of AMCs to buy a mutual fund scheme. You may have to visit the physical branch of that particular AMC and submit an application form along with the necessary documents. The company will approve and provide a PIN and folio number to you for managing your investments.
- Offline and Online Distributors: Mutual fund schemes can be purchased through online distributors, which offer a consolidated platform for tracking and managing investments efficiently. Those who prefer physical acknowledgements can opt for offline distributors for added convenience.
- Registrars and Transfer Agents (RTAs): You can also, consider buying mutual funds directly from the RTA’s website without opening a Demat account.
Final Thoughts
A Demat account allows you to track and hold different mutual fund schemes in a single channel. Although it has numerous benefits, it is not mandatory to use a Demat account for mutual funds investment.
You can download the Torus Digital application to invest in your preferred mutual fund schemes. Torus Digital allows you to open a Demat account for free and start investing in mutual funds with a SIP of just ₹100.
Sign up with Torus Digital and start investing now!
