Should you keep Mutual Fund investments in Demat or in Non-Demat form?


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It is known to all that one needs a Demat account in order to hold shares. Very few people know that you can hold mutual fund units in a Demat form as well.  Mutual fund investors have the option to hold the units in a statement of account or SOA  form, or in a dematerialized or Demat account. In both these cases, the units are held in digitised form and not as a physical certificate.

Demat account v/s Statement of accounts

Holding mutual fund units in Demat form is not compulsory. For SOA, the units are controlled by the respective Asset Management Company or AMC, whereas, in a Demat form it is controlled by Depository Participant or DP, like the Central Depository Services and National Securities Depositary. Units Demat form can be bought and sold through stock exchanges, through your DP, or broker.

Having a Demat account is beneficial when you can invest in exchange traded funds or ETFs often because these funds can only be traded on the stock exchange. Transmission of units to the nominee is easier in Demat form in case the unit holder is no more. However, in case you have units in SOA, you will have to submit a transmission request to the registrar and transfer agents or RTAs of various funds.

There are certain drawbacks of holding Mutual Funds in Demat form. In case you hold units in Demat form you cannot opt for a systematic transfer plan or STP, or systematic withdrawal plan or SWP. Both SWP and STP can be necessary requirements for some investors for better financial planning.

You need to pay annual maintenance charges for holding a Demat account which is usually in the range of Rs 300 to 700, from transaction charges which are around 0.05% per transaction. In the case of mutual funds in SOA form, it allows you to transact through investor service centres of mutual funds or its RTA. You can even transact online with no Annual fees.

For a Demat account,  an individual cannot have multiple account holders for one particular investment. This restriction makes it difficult to distribute investment amongst more than one successor.

Earlier, the main advantage of holding a Demat account was that you could see all your investments including bonds, shares and mutual funds, etc in one single statement. Nowadays, you can get a  summarised account statement from NSDL CAS for all your investments in securities like mutual funds, irrespective of whether they are in a Demat form.

When it comes to the redemption and purchase of liquid funds in Demat form, the processing takes time and is done at the DP’s end. In case you hold liquid funds with AMCs, buying and selling are carried out on the same day.

Advantage of holding mutual fund units in SOA form clearly outweighs the benefits of the Demat account. Therefore it would be wise to choose SOA mode.

In case you want to convert your mutual fund units from Demat to SOA form, you need to fill out a rematerialisation request form with your DP.

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