Never Hold Mutual Fund Units in Demat Form!

Published: August 10, 2016 at 10:33 am

Last Updated on

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 (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

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