“Dematting” of MF Units : Should you go for it ??

“Life has become so easy after the share trading has started in demat form” , Said Romesh Acharya, a 32 year old marketing professional, working with a leading FMCG Company. “I am wondering if I should also demat the mutual fund units lying with me ??” he asked his colleague Kapil Sharma, who is a well informed investor and usually guides Romesh to take all these decisions.

“What is the meaning of dematting of Shares, Romesh ?”, Asked Kapil.

“Earlier when I used to trade in market, I used to deal with physical share certificates. I had to physically count and check the number of shares. Also, there was a risk of Share certificates being fake, or they also had a risk of theft from my own custody. Now, since I have dematerialised them, I don’t have to worry about counting the quantity and also checking the authenticity. I am also free from the risk of the physical certificates getting misplaced or theft from my place. Thus, in totality, it is a very peaceful deal.” Said Romesh.

“I completely agree with you on this. Now just think for two minutes, do you have any such risk with your mutual fund units.

  1. You have a statement coming from the registrar of the fund house indicating the number of units you hold. So you don’t really sit and count the number of units you have (which you were doing with physical shares and found troublesome).
  2. The Statements can be directly requested from the fund house or its website, so there is no scope of a fake statement having a false figure of units. So in mutual fund units, you don’t even have a risk of unauthenticated units being dumped to you.
  3. Finally, even if you happen to misplace the mutual fund account statement, which mentions the number of units held by you, there is no worry. You will again receive a fresh statement in the next quarter which will have all the details. Alternatively you can also request a statement immediately to know your holdings.

So if you look at all these points, you will observe that the benefits which could be available to you in demat, are already available to you for your mutual fund units.” Explained Kapil.

“Ok, I agree with you on all the above points. But Still I have one question. Would there be any disadvantage if I demat my mutual fund units ?” Asked Romesh.

“Now that’s an interesting question”, smiled Kapil, “ The moment you demat your mutual fund units, you forego your right to redeem them directly. You need to compulsorily sell them on an exchange, which would involve transaction costs even while selling; whereas, there is no such cost when you are redeeming your mutual fund units. Also, you need to find a buyer for your mutual fund units on the exchange. Although this might not be a great problem for maximum cases, there might be some occurrences where you do not find a buyer and the units behave like an illiquid assets (which destroys the purpose of investing in mutual funds, as we invest in them as they are one of the most liquid form of assets).”

“So what you are saying is, there are only disadvantages of dematting mutual fund units and there is no advantage of doing so ??”, asked Romesh.

“Well, I am not saying that. So far I just said that you would not get any additional benefits by dematting them, which you were getting in case of shares. So the answer to your question is yes, there are some advantages of dematting of MF units. If you are not a long term investor in mutual funds, and want to trade them like shares, then dematting them is the right strategy for you. You can buy and sell them frequently and make some short term profits and this would be difficult if the units are not in demat form.” Explained Kapil.

“No Buddy, I am at least that much an informed investor, that I should be a long term investor in mutual funds, in fact overall equity markets, to create wealth for myself. So I would rather not demat my mutual fund units which would rather increase my cost than give me any benefits. Thanks for all this useful information”.

(All the characters in the above article are hypothetical. There resemblance to any person, living or dead, will be purely coincidental)

We look forward to your feedback and comments on the above article. Please feel free to contact us on saurabh.nidhiinvestments@gmail.com if you have any questions.

Published by professorbajaj

Prof. Saurabh Bajaj is an Author, Mentor, Motivational Speaker and Wealth Planner. He has done his MBA from Narsee Monjee Institute of Management Studies (NMIMS) Mumbai, one of the top 10 management institutes in India. He holds the prestigious FRM (Financial Risk Manager) degree awarded by Global Association of Risk Professionals (GARP), USA. Till date, there are less than 15,000 professionals in the world, who have been honored with this degree. He has also been awarded CFGP (Chartered Financial Goal Planner) Certification by AAFM (American Academy of Financial Management). After his MBA, he joined J P Morgan, the second largest Investment Bank in the world. He has worked with J P Morgan as Risk Analyst for more than two years. Prof. Bajaj also holds an Advisory certification awarded by AMFI (Association of Mutual Funds of India). During his stint at Bombay Stock Exchange, he has handled Investment Management and Treasury operations of the BSE Corpus. He has set up an entrepreneurship venture in the field of Wealth Planning and Investment Consulting under the name “Nidhi Investments” and holds the profile of CEO. Prof. Bajaj sits on the Expert Panel of CAClubindia.com and MBAClubindia.com as Investment Expert. He is actively involved in investor education through his blog www.professorbajaj.com which has a readership from 78 Countries all over the world. His articles are also regularly published in caclubindia.com , mbaclubindia.com , totalca.com , charteredclub.com, bankbazaar.com and lawyersclubindia.com . He has been awarded the title of “Best Article Writer” from caclubIndia.com in Jan 2012 and has been selected amongst “Top 5 Technical Writers” from all over India in Feb 2013. He has been invited by various TV Channels like SPIN TV, CNBC TV18, UTV Bloomberg Etc for programs like "Expert Advice" , "What Markets Want ", "Budget Analysis" etc. He has been invited by Several organisations like Lions Club, Rotary Club, Agrawal Welfare Foundation, Rajasthan Mandal, Agroha Vikas Trust, Union MF, UTI MF, Arthamitra Gurukulam, Vidyalankar Institute of Technology etc for expert lecture on "Smart Investing", "Life is A Celebration", "Financial Freedom", "The Digital IFA" etc. He was ranked 8th Merit at All India level NMAT which got him selected for MBA programme at NMIMS, Mumbai. He did his MBA with Capital Markets as his specialisation. Soft Skills has become an inevitable part of every selection process and teaching learning process these days. The students from small towns and tier II cities, in spite of being talented and well equipped with technical skills, are seen struggling in the selection process. This is because of their lack of exposure to these soft skills. Mr. Bajaj has a zeal for training candidates to develop these skills and has been imparting the same on since last two years. This zeal and passion inspired him to set up his own firm called “Knowledge Circle” which aims to train candidates for soft skills. Till date, he has trained more than 5000 participants from over 220 organizations across various fields of soft skills. He has been associated with MSBTE (Maharashtra State Board of Technical Education) to conduct Soft skills training workshop for the faculties of Polytechnic Colleges in Entire Maharashtra (Mumbai Region, Pune Region, Aurangabad Region and Nagpur Region) since last 8 years. He has also been associated with ICAI (Institute of Chartered Accountants of India) for training CA Students on various topics related to Communications skills, Group Discussions etc. He was invited by Fr. Agnel Polytechnic College, Vashi for a motivational workshop for faculties. He was also invited by Vivekanad Polytechnic College for "Communication Skills and Email Etiquette" training for non-teaching staff. Apart from these, he has conducted “Capacity Building Soft Skills workshop for Faculties” at ITI Gunj, ITI Pusad, ITI Digras and ITI Umarkhed. This was the first ever soft skills workshop for faculties in the history of ITI’s in Vidarbha. He was also invited by Shivaji Education Society to conduct similar Soft skills workshops for the faculties and office staff of Shivaji Junior College Pusad, Shivaji High School Pusad, Shivaji Vidyalaya Belora and Shivaji Vidyalaya Bhojla. He has conducted training workshop on “Effective Presentation Skills” for the relationship managers of HDFC Mutual Fund, Andheri Branch, Mumbai. He has also been invited at College of Management and Computer Science, Yavatmal, College of Dairy Technology, Warud, B N College of Engineering, Pusad, B D College of Engineering, Wardha, College of Engineering and Technology, Akola, Dr.N.P.Hirani Institute of Polytechnic, Pusad etc. for the Guest lecture on “Developing Interview Skills”.

12 thoughts on ““Dematting” of MF Units : Should you go for it ??

  1. I think all the questions that I had about demat of mutual fund units, got answered after reading this blog.

    Would like to know more about investments and markets. Could you help me Sir ??

    Anmol Gulati

  2. Yes now all my doubts about whether shoud I Xfer my MFs to DEMAT is solved. MF are for long term and using it for short term trading will defeat the purpose.

    Nice article sirjee.

    1. Thanks for the compliments Sir !!

      Its indeed a pleasure to know that you found the article useful. This being a confusion in many people’s mind, I thought I should write an article on this.

      You are most welcome to provide more suggestions about what you would like to gather more knowledge on.

      Thanks again for your visit and feedback. Looking forward to more in future.

    1. Thanks bro.

      Good to see that you are finding time to read the article with so little time left for your wedding. Its indeed a great compliment in itself.

      Thanks again for your visit and feedback. Look forward to more in future.

  3. Very Informative sir !! Was thinking about moving my MF investment into the demat form but afer reading this have changed my mind. Thanks

    1. Thanks Lalit ji !!

      Feels nice to know that the articles are helping you to arrive at good decisions. Its indeed a great compliment.

      Thanks again for your visit and feedback. Looking forward to more in future.

  4. Still Mr.Saurabh if it is for long term investment then there is no need for selling the Units frequently, then there is no issue of loosing money while selling. And also i had problems with the mutual funds in physical format which needs seperate kyc every time and bank mandate seperately. Many mutual funds do not send statements for years together in which case the responsibility to maintain all the folios becomes difficult particularly for the highly mobile middle class people.

    1. Thanks for your insightful comments Sir !!

      Yes, agreed that if it is a long term investment then there is no need to sell units frequently. However, you might also be knowing that, many a times we need to switch funds due to various reasons like change in our risk profile, change in the fund manager or the sponsor of the fund house etc. So the additional cost while selling could be one of the factors to think over. Also, there is a small difference between selling fund units and redeeming fund units. When you redeem, the fund house pays you. When you sell, there needs to be a buyer. Now when buyers have an option of buying it cheaper from the fund house, they will be less interested to buy it from the exchange, as they would need shell additional brokerage for that. So, there could be a situation (with low probability) that you do not find a buyer, or the buyer quotes a lower price.

      Coming to the KYC part, we have already moved to a single KYC platform from Jan 2012, wherein the same KYC would be used by various financial entities. Even earlier, one KYC was accepted by all AMCs (if not by other entities like NBFCs and Insurance Cos). So as far as MF units are concerned, you have to do your KYC only once.

      Coming to the MF statement part, you can even ask your advisor to provide you account statements. These days, most of the advisors also provide consolidated account statements with valuations.

      But your point is well taken. If someone still wants to demat his /her MF units, they can do that. Its just that we need to focus on few more factors which are beyond the obvious. Even after considering all the factors, if we feel that demat is the way to go, we are free to do that.

      Thanks again for your visit and feedback. Looking forward to more in future !!

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