Investing in mutual funds is deemed to be one of the safest and most trustworthy investment strategies due to the degree of diversification it offers.
After the facility of investing in mutual funds was made more convenient with the introduction of 3-in-1 account, mutual funds have become an investment instrument that’s highly utilised by both professionals and novices! The 3-in-1 account acts as a single account that provides the functions of trading, savings, as well as demat account.
Moreover, starting a demat account is equally simple and hassle-free!
What is a Demat Account?
The concept of a demat account was first introduced in 1996 in India, wherein investors could maintain their securities in a dematerialised form. By doing so, the physical share certificates were converted electronically and stored in the demat account. There was a dire need to convert physical share certificates into digital format as these physical documents could be easily manipulated or tampered with.
The method to invest in mutual fund schemes using a demat account is quite similar to investing in shares. A demat account holds mutual funds, shares, bonds, government securities, and exchange-traded funds.
Let’s take a look at some of the advantages of holding mutual fund schemes in a demat account.
Streamlined Investment
A demat account presents you with an opportunity to hold your securities in an accessible and central place. National Securities Depository Limited (NSDL) and Central Depository Services (CSDL) are the two depositories that maintain all the demat accounts in India. The depository participants (DP) act as a mediator between an investor and the central depositories. Brokers, banks, and brokerage firms operate as DPs which facilitates the process of converting physical documents into electronic format and credit the same in your demat account.
Moreover, you can invest in multiple securities across different fund houses with the help of a demat account. Furthermore, the requirements for KYC while investing in mutual funds only need to be implemented once. Consequent investment in mutual funds from any other AMCs (asset management companies) can be easily performed without going through the KYC process again.
Automatic Updation
A demat account offers a multitude of advantages which weren’t possible in case of physically storing investment securities. Other than keeping investments in a central place, a demat account is also automatically updated every time you transact! Dematerialization has presented investors with a great alternative to holding their investment in a risk-free place as there are absolutely no possibilities of loss or physical damage.
Less Labor
While the general expense of a transaction has diminished, the security of obtaining mutual funds or any other investment scheme has increased. However, if you invest in mutual funds with a demat account, there’s less probability of thefts, fake shares, or any other fraudulent practices. Thus, the efforts and documents required in the opening of a demat account are also comparatively lesser.
Easy To Use in case there’s a change in Contact Information
A consolidated platform such as a demat account is helpful when an investor wants to change his/her mobile number or address. Rather than filling out various application forms to different mutual fund organizations requesting for a change in contact details, all you need to do is provide one form for all securities you hold. Once the switch is registered with your DP, the same will get updated electronically with all the AMCs & Registrar and Transfer Agents (RTA).
Tracking Securities
The ability to track mutual fund investments has become more convenient for investors as depository service providers such as NSDL and CDSL give out an integrated account statement with all the details related to the transactions on a quarterly basis. The statement includes mutual funds, stocks, and other financial instruments. An investor can also ask for a mutual fund holdings statement which can be generated with the help of web portals of RTA.
What To Keep In Mind While Investing In Mutual Funds Via Demat Account
An investor looking to invest in mutual funds through a demat account must know specific information that may influence his investment decision.
If you’re looking for a direct option of investment, then using a demat account won’t be most suitable for you since holding mutual funds in demat form denies this option. However, investors who wish to invest in mutual funds directly are not restricted and also save the commission cost. This implies that an investor has to go for the normal option for investment where the cost is slightly higher than the direct option. But, if you can pay the extra charges and commission fee without a detailed assessment, then a demat account can be a better and more convenient option for you!
Investors can fare well in a world of mutual funds if theypossess extensive knowledge about demat accounts and are able to transact, buy and sell units to perform the investment process. As an investor, if you need amore consolidated holding of your mutual fund securities for secure and easy management, then the demat account route is the way to go!
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