Never Hold Mutual Fund Units in Demat Form!

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,

  1. We contact our depository participant (DP) – demat account provider
  2. 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.
  3. The AMC makes the DP the holder of the security (while we are owners)
  4. Then it will reflect in our demat account

This process in of itself should be a put off!

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 ( 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.

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( 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!
NSDL FAQ about dematerialization 1

Create a "from start to finish" financial plan with this free robo advisory software template

Free Apps for your Android Phone

Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)

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14 thoughts on “Never Hold Mutual Fund Units in Demat Form!

  1. been there & gone through this pain :))

    I used to use (still using) ICICI Direct for my Mf holdings. Once MFUOnline came, wanted to do fresh purchases via this new platform to by Direct Funds. I thought making it in Demat form will help me to track it via ICICI direct (where my existing funds are already there).

    But everything was not as smooth as I thought and burnt my figures in the process. Thanks for this super helpful post. I am sure it can educate & save a lot of people from the unnecessary pain we might get into.

  2. You are absolutely right. I cannot fathom the purpose of demat holding in Mutual Fund – when the normal holding itself in a simple, electronic form.
    What I have noticed is that people get confused between electronic holding and demat – as both are electronic forms of holding.
    I think the regulator has to do a better job of educating.

  3. There is still one good reason to hold MFs in demat form. If you happen to invest in ETFs (or direct equity) and index mutual funds, a demat account allows you to link all your assets. That way it is easier to trace your investments.

    I had made investments in a number of funds before CAN and dematerialization was possible. The paperwork that I had to maintain had turned into a nightmare. In many cases, I had ‘forgotten’ about an investment until I happened to see the account statement in post. Lesson learnt: If you are paperwork-challenged (the kind that can’t seem to locate any important piece of paper when it is needed), then it is best to go online and importantly tag all your papers under one CAN or demat number.

    Demat also makes it easier for your nominee(s) to locate all your assets in case you are not around and tagging them to one demat reduces the nightmare.

    In fact I would suggest that if and when possible, convert your insurance papers into demat form and preferably link it to the same demat account that lists your shares and MFs. Wouldn’t it be nice if all real estate documents could also be dematerialized, so the problem of lost papers is not there?

  4. Hello Sir, if I buy MF from icicidirect or sbismart will it by default be in delay form ? What is non-demat form ? How does it look ?

  5. As it is mentioned in the article, i might have selected the option demat at the time of investment. How to change back now? I understand that I have to talk to MF companies, but how easy it can be done? Anyone , can let me know? Thanks

  6. Pattu even though I agree with the title there are factual errors eg “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!”
    Money NEVER goes to the demat account, A demat account CANNOT have cash in it, the redemption proceeds go to the Bank account LINKED with the demat account. That’s the same bank account where your dividends of your shares get credited so whats the problem? You have to maintain a bank account from where the demat charges will be deducted or dividends will be credited.

  7. The fact that we cannot hold units in decimals in Demat Accounts is actually a turn off….

    But I’m surprised that if we can hold units in decimals in Physical Form, then why cant we hold units in decimals in demat form….

  8. Hey Jithu,

    I’m in the same situation now where I’ve stopped my regular SIPs in Idirect and looking at MFU. What were the pains you had to go through? What complications will arise if I link my MFU Direct purchases to my demat account?

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