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Holding mutual fund units in demat form offers little benefit

Holding mutual fund units in demat form offers little benefit

Online platforms, which offer click-of-mouse transactions and consolidated viewing of portfolios, that too without any annual fee, can be a better option.

Mutual funds offer investors the option to hold units in demat (short for dematerialised) form. But does this really help investors?

Sudhakar Gupta, a private sector bank employee in Pune, buys mutual fund units on an online platform. All his transactions are online and he gets account statements every time monthly systematic investment plan (SIP) amount is debited from his bank account. He can also view the consolidated statement of all his mutual fund investments on the website of the distributor. Does someone like Gupta require the demat option?

You can hold mutual fund units in the same demat account through which you buy/sell shares . It means you can buy/sell mutual fund units electronically and track all your capital market investments in a single statement.

You can convert mutual fund units into demat form by submitting a conversion request form which you can get from your broker or depository (NSDL or CDSL).

After verification, the depository will send the form to the asset management company or its registrar and transfer agent, or RTA, which will confirm the conversion request after verification.

Rs 300 is the average minimum annual charge for maintaining a demat account with a stock broker.

After conversion, all subscriptions/redemptions will have to be routed through the broker. The broker will buy units on the stock exchange platform and credit them to your demat account.

Redemption is possible through either broker or depository. You can send a redemption request form to the depository, which after verification will send the request to the fund house and its RTA. The fund house or the RTA will pay to a brokers' pool from where the money will go into your bank account.

A depository works as a safekeeper of securities and settles transactions between different parties in the capital market. An RTA processes application forms, redemption requests and dispatches account statements to mutual fund unit-holders.

There are some benefits - paperless transactions and single statement for all investments through stock exchanges - of holding mutual fund units in demat account.

V Ganesh, chief executive officer, Karvy Computershare, says the option helps those who already have demat accounts and want a single statement for all capital market holdings.

Another benefit is that units can be freely transferred to the accounts of nominees or legal heirs, except in case of tax-saving funds, which have a three-year lock-in. However, transactions through brokers involve a yearly demat fee of Rs 300-500 and a brokerage every time you transact. The brokerage could be more than 0.05 per cent per transaction.

Compare this to transactions through mutual fund agents, who can charge Rs 100 for every subscription of more than Rs 10,000 from existing customers and Rs 150 from new investors.

"Holding mutual fund units in demat form results in more intermediaries. First, there will be a demat provider, then the clearing house, next the bank and lastly the stock exchange. This will automatically make transactions costlier," says Nelson D'souza, general manager, Fundsupermart, an online mutual fund distributor. Grievance redressal, too, becomes complex. While grievances related to the application process are handled by brokers or exchanges, any complaint related to the units is addressed by RTAs/AMCs.

Procedure for converting mutual fund units into demat form
That is not all. You cannot have multiple folios and use options such as systematic withdrawal or systematic transfer and daily, weekly or fortnightly dividends. Besides, schemes of not all fund houses are available on exchange platforms. For instance, on the NSE, schemes of only 30 out of 43 fund houses are available, while only 29 fund houses are linked to the BSE.

Is there at all physical form of mutual fund units?

"There is no physical way to hold mutual fund units. Mutual fund units are held by RTAs and the investor gets account statements. The investor does not get a physical unit or any other certificate," says C R Chandrasekar, CEO, Wealth India, which owns the online distribution platform for retail investors.

Online platforms, which offer click-of-mouse transactions and consolidated viewing of portfolios, that too without any annual fee, can be a better option than holding units in demat account.

It must be mentioned here that any investor can get a consolidated statement of mutual fund investments on his e-mail by directly requesting the RTAs.

Converting mutual fund units into demat form thus becomes a futile exercise for most existing investors as the negatives clearly outweigh the positives.