“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.

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12 Comments

  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 ??

    REgards
    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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