One of the most common ways for investors to engage in the stock market is through mutual funds. They offer the benefit of posing a lower risk than investing directly in equities while providing investors with rewards equivalent to direct market participation.
As a result, mutual funds are popular among both new and novice investors, as well as seasoned investors. With the introduction of internet trading, you may now use your demat account to trade mutual funds as well.
A demat account is a single location where you may keep all of your shares in electronic or dematerialized form. All of your investment portfolio's certificates, such as bonds, mutual funds, government securities, and shares, are stored in a demat account. A demat account makes mutual fund trading much easier.
Although a demat account is a useful instrument in trading and is recommended if you want to invest in mutual funds, it is dependent on the investor's needs. Let us discuss what a demat account is and how it helps in mutual funds trading.
What is a Demat Account?
A demat account is primarily used to keep securities and shares electronically. As a substitute to actual share certificates, the idea was first presented in the nation in 1996. A demat account not only simplifies and speeds up share trading, but it also eliminates all of the difficulties and issues that come with actual share certificates.
A demat account may be used to hold a wide range of investments, including stocks, ETFs, bonds, debt instruments, mutual funds, and government securities. If you want to invest in the Indian stock market, you must have a demat account.
What are Mutual Funds?
A mutual fund is a type of investment vehicle that is created when an asset management company (AMC) or fund house collects contributions from a number of individual and institutional investors that have similar financial goals.
The pooled investment is managed by a fund manager, who is a finance professional. The fund manager makes stock and bond transactions that are in compliance with the investing mandate. Individual investors can obtain exposure to a professionally managed portfolio by investing in mutual funds.
Do you require a demat account for investing in mutual funds?
In order to invest in mutual funds, you do not need a demat account. The sole condition is that you complete the KYC procedures. You do not need to re-submit your KYC papers for future investments once you have registered with AMC or authorised intermediaries. Mutual funds can be purchased through net banking, online or offline distributors, asset management firms, or your regular broker.
Advantages of demat account for mutual funds
- A Demat account serves as a single repository for all of your investments. In India, there are two depositories that hold all demat accounts: NSDL and CDSL. The depository participants serve as a link between you and the central repositories. Depository participants, often known as DPs, include banks, brokers, and institutions.Your physical instruments can also be converted into electronic credit in your DP account, with the help of the depository participants.
- While the transaction's total cost has decreased, the security of acquiring mutual funds or other instruments has risen. There are no risks of fraudulent shares, thefts, or other malpractices with a demat account, which were common while trading and investing with actual paper papers.
- Demat accounts offer a number of advantages that would not be accessible if your investment records were stored physically. The demat accounts are updated immediately every time you deal, in addition to storing all of your investments in one location. Maintaining investment certificates has become risk-free due to demat accounts, as there is no risk of physical damage or loss.
- When you open a demat account, you name a nominee to whom your demat account assets will be transferred in the event of your death. Nomination becomes easier when you use a demat account for mutual funds since all of your assets may be simply handed on to your heir. If you held mutual funds in physical form, the nomination procedure would be more complicated since you would have to apply for a nominee for each asset class separately.
Disadvantages of demat account for mutual funds
- Because the inclusion of the broker and the DP in the chain increases the number of intermediaries between the buyer and the seller, buying and selling mutual funds with demat accounts might take longer.
- AMCs (Annual Maintenance Charges) range from Rs. 300 to Rs. 400 for having a demat account.
- If they are not tech-savvy, demat account users might become easy targets for internet fraud. Because of their lack of technology expertise, they rely on third parties for help, who may or may not be reliable.
- When it comes to demat account an investor must additionally consider the depository participation charges per instruction that apply at the time of unit redemption.
Steps to open a demat account for mutual funds
- Fill out the application form supplied by your broker/DP and attach copies of your KYC papers, such as proof of identification, proof of address, and passport-sized photos.
- PAN numbers must be provided in order to create a demat account.
- All of your papers will be validated after your DP has received them. You will be issued a login ID and password to access your demat account after it has been confirmed and authorised.
- You must link your demat account to your bank account after you receive your demat account information in order to conveniently move cash between your demat and bank accounts.
Mutual funds are an excellent method to participate in the stock market, particularly for beginning investors who do not want to risk their money by buying individual equities. Demat accounts for mutual funds are a quick and simple method to invest in mutual funds, as long as you open a demat account with a reputable broker that charges minimum fees and facilitates demat mutual fund transactions.