Last Updated on August 30, 2021 at 3:47 pm
Never hold your mutual fund units in demat form! In this post, Anish Mohan draws from personal experience to explain why dematerialisation is a terrible idea with no benefits whatsoever!
What is Dematerialisation?
Dematerialisation is the process by which a physical certificate of holding a share or bond or mutual fund unit is converted into an “electronic balance”.
In order to convert a physical holding into demat form,
- We contact our depository participant (DP) – demat account provider
- The DP checks the validity of our holdings with the issuer – the AMC or the registrar and transfer agent (eg. CAMS, Karvy) in case of mutual funds.
- The AMC makes the DP the holder of the security (while we are owners)
- Then it will reflect in our demat account
This process in of itself should be a put off!
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Guhan Ramanan (another guest author and contributor) lamented checking the “hold in demat form option” while buying directly and pointed out that the words demat mode gives the incorrect impression of security and convenience. In fact, it is after Guhan’s emails that I requested Anish to write about this.
Consider this, I have bank A registered with the AMC. If I check demat mode while buying mutual fund units, it will show up in the demat account. If I make a redemption, the money will go to the demat account and I will have to transfer it to my linked bank account which could be different from bank A! What a mess!
If I hold a physical certificate which I wish to trade in the secondary market (old shares or bonds), then dematerialization makes sense.
Mutual fund units are electronic to begin with!! Today, I can buy and sell fund units directly from the AMC, with CAMS, with MF Utility, with direct fund portals and from ‘free’ accounts that get commissions from our NAV. Where is the need to hold them in demat form?
Selling mutual fund demat units in the secondary market
If I hold closed-ended mutual funds and If I can find a buyer in the secondary market before maturity (a big IF!), then holding those units makes sense. But practically no one buys closed ended funds with the aim of selling them mid-way – for the simple reason, it is not possible to find buyers. So no advantage here.
Transfer and Transmission of mutual fund demat Units
Thanks to a circular by SEBI, it is theoretically possible for a person to transfer mutual fund demat units (free from lock-in) to another demat account holder. However, I have my doubts about how ready DPs and AMCs are to do this. Even if they are ready, how many invest in mutual funds with the aim of transferring them? Easier to redeem and give the money!
Sure, transmission of demat units from the account of a deceased holder to a nominee is possible, but a simple either/or survivor or an single holder account with a nomination is enough to get this done. Dematerialization does not offer any special benefits.
Rematerialization or Redeeming demat units is a pain!
Demat accounts store equity shares which come in Whole number (X) whereas mutual fund units are allotted up to 3 places of Decimals (XX.xxx)*. So when MF units are stored in Demat accounts with decimal places, at the time of redemption, you will never be able to sell ALL units since most Brokerage sites cannot handle decimal places in SELL option. You can only SELL the units in whole numbers. Right now, I have units of various MF with balance of .113, .129 in my Demat account which I cannot sell since it is lower than minimum allowable redemption unit. Rematerialization* is clumsy since its fee is higher than the amount left in that Folio !
* For rematerlization of existing demat units, one will have to apply to the DP.
*: Prashanth told me that Zerodha coin allows fractional demat mf units
Other Points:
An MF unit in SOA (Statement of Accounts) mode is anyway paperless or Dematerialized. No advantage in storing in Demat.
A consolidated account statement is given by NSDL CAS (Common Account Statement) and therefore consolidated statements are no reason to go the Demat way.
Brokerage Fee coupled with Demat Account service charges will eat from your corpus and the whole motto of elimination of transaction fees is frustrated.
Still not convinced? Have a look at the so-called advantages listed by NSDL in its FAQ on mutual fund demat units and judge for yourself.
Please joining me in thanking Anish Mohan for yet another useful and informative post. Do check out his other articles:
How to buy and sell direct mutual funds using MF Utility Portal
Reader Story: Arise, Awake and DIY!
MF Utility now has a Mobile App to Transact in Direct Mutual Funds! (co-authored by Dr Ravi Kyadiggeri).
I also thank Guhan Ramanan and Subra(money.com) for urging me to work on this topic. Do check out Guhan’s contributions:
Google Spreadsheet for tracking progress to financial freedom
Reader Story: A Force Awakens!
Reference:
NSDL FAQ about dematerialization 1
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)