Is a Demat Account Required for Investing in Mutual Funds?

Is a Demat Account Required for Investing in Mutual Funds?

As per the regulations, dematerialization accounts have been made mandatory if you want to trade in shares. However, a common question in your mind maybe if the account is mandatory to trade in mutual funds.

In short, you do not need a dematerialization account if you want to invest in mutual funds. You may buy or sell fund schemes directly from the asset management company (AMC). Additionally, you may avail of the services of third-parties, banks, or personal advisors to invest in mutual funds.

Comply with Know-Your-Customer (KYC) norms

Although a demat account is not mandatory to invest in mutual funds, you may still want to use one as it makes it easier for you to manage all your investments through a single account. The account is registered with either the National Securities Depository Limited (NSDL) or the Central Depository Services (India) Limited (CDSL) through a Depository Participant (DP).

When you open a demat account, you need to comply with the KYC norms. This requires submission of certain documents such as Permanent Account Number (PAN) card, and copies of address and identity proof.

Understanding a depository

A depository acts as an agent between the company that issues the shares and the investors like you. There are two depositories registered with the Securities and Exchange Board of India (SEBI) namely NSDL and CDSL. Brokers that offer dematerialization services must be registered with one of the two DPs.

Benefits of a demat account

You do not need a dematerialization account to invest in mutual funds. However, there are several advantages to use one to invest in funds. Here are four such benefits:

  1. Simplifies the process of selling, buying, and managing investments in multiple funds
  2. It is a single dashboard through which you may transact and manage your investments in different AMCs
  3. Depicts a single statement listing all your mutual fund holdings
  4. Addition and management of nominees is simple in a dematerialization account

However, there are certain disadvantages of using such an account to invest in mutual funds. These include some expenses such as the annual maintenance charges, upfront commissions, and other trailing charges. This may reduce your actual returns on the mutual fund investments. Here are other ways that do not require opening a demat account online or offline but still allow you to invest in mutual funds:

  • Any bank
  • Through CAMS
  • Offline with any branch of the AMCs
  • From the AMCs website
  • Independent financial advisors
  • Online third-party portals

From the aforementioned, it is seen that a dematerialization account is not necessary to invest in mutual funds. It is optional but using one for investments has several benefits. You must evaluate the pros and cons to make an informed decision.