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Personal Finance

Mutual Funds and Demat Fallacies

Some advertisements recently give the impression that you can "Demat" your mutual funds! Yippee! So you should buy through a stock broker on an exchange!

But this is a stupid reason.

Mutual funds are "dematerialized" anyway.

Materialized means that the unit certificate that you have is the be-all and end-all of your ownership; in the past, shares were sold as certificates. When you sold, you gave your certificate to the broker, who would find a way to get it over to the new buyer. If you lost your certificate, you were in deep doo-doo. You had to file an FIR and hope you had a photocoyp and beg and plead and offer your children as guarantee to get your shares back. Many instruments – NSCs for one – are like this.

Dematerialized means what you get in paper is an account statement, that your holdings are really maintained electronically. If you lose your statement, no big deal, you just call them and they send you a new one. You might need some details, but usually they can find your holdings with a PAN number nowadays. Shares are now usually held in demat mode, with demat "depositories" like NSDL and CDSL accounting for a major part of all share holdings in India.

Mutual funds are dematerialized anyhow. Even if you buy through your neighbourhood agent. Mutual fund "registrars and transfer agents" like CAMSOnline keep an electronic record. If you lose your certificate, nothing is lost. You can still redeem, buy more, get dividends etc. You don’t have to buy through a stock broker. Buying through a stock broker makes your holdings go into your demat account.

To understand, visit and click on "online services for investors". As for an ActiveStatement, given only your email id. You will get an account of all CAMS maintained funds that you have ever bought in history, just like that, on email.

Stock brokers charge 0.50% for buying and selling funds. Further, most demat accounts have a fixed cost per year (about Rs. 400) and then they charge you Rs. 15 or so per transaction. That’s idiotic at various levels because selling or holding mutual funds comes with next to no risk to either of them, but they choose not to reduce the cost for you. Thieves.

Today, a local agent is cheaper – your cost to go with him is Rs. ZERO, since there’s no entry load. You would be much better served by doing that or hey, buying directly from the mutual fund itself. Don’t fall into some stupid argument by companies which throw money at advertisements, that owning mutual funds in demat accounts is better. It is not.

  • Srikanth Meenakshi says:

    >//Today, a local agent is cheaper – your cost to go with him is Rs. ZERO, since there's no entry load. You would be much better served by doing that or hey, buying directly from the mutual fund itself. //

    Jeez, I really wish there were a service where you can get the convenience of online transactions while having access to several mutual funds at zero transaction cost to the investors.



  • Jeppu says:

    >While what you say is true, I would think there is some benefit in having your investments in a single demat account.
    When my father passed away, we struggled to find the details of all the different mutual funds he had invested in. There was no risk I agree but the trouble could have been avoided if it was organised in a single account.

  • Manickkam says:

    >Is such a portal that gives what we want here.

    I also got to know about this just recently and fighting with my broker in getting to know all the related unknown charges!

  • Deepak Shenoy says:

    >Jeppu: Yes, there is a single nomination facility for demat, single point of documentation etc.

    I would definitely recommend it if costs of demat and transactions were lower (at say a flat Rs. 10 per trade).

    Trouble is always trouble. I know people who have 10 demat accounts. it doesn't help them either!

  • Ayon Dutta says:

    >Thanks Deepak!
    This article was just on cue.
    Was trying to understand transaction process cycle in the era of electronic systems for
    a) MFs (Folio nos., CAMS, etc.)
    b) equity shares (Depository, depository participants, RTAs, trading a/c, etc.)
    c) bank accounts (savings, ODs, cheque encashment mechanism, NEFTs, etc.)
    d) Debentures & Bonds (payments, certificates, call-put-buyback process)

    And in all these types of securities and instruments the roles played by financial intermediaries (banks, NBFCs, broking house, etc.) and what are the requisite license/permissions required from regulatory bodies (SEBI/RBI/IRDA, etc.) to either peddle these instruments.

    Maybe you could point to your own posts to elaborate further

    Btw, what kind of services is Zerodha looking to provide?

  • Anonymous says:

    >These ads have been put out by SEBI and given the rather uncertain value, it raises a question – what is SEBI focussing on these day? Hopefullly the focus does not shift from assisting investors to helping Fund Houses increase their business at a cost to investors.


  • Anonymous says:

    >Obviously Srikanth is promoting his company. However, if you have a brokerage account, you can buy and invest in Funds (not through the exchange) at no cost. I have this service through Kotak.

  • Deepak Shenoy says:

    >Ayon: Zerodha is a broker but they charge a flat rate per trade. Nithin's a friend – I have no equity or financial interest in the company.

    In terms of SEBI rules and so on, I haven't posted about those, but you could check out hte SEBI/RBI/IRDA web sites to start.

    Anon: I hope so too!

    Anon2: Yes, Kotak, Sharekhan, ICICI Direct and HDFC and a number of intermediaries allow you to invest through a web site, as does fundsindia.

  • Px says:

    >How many people hold demat mfs? is there any stats … mostly it is a rare few cause of the charges ..
    Demat costs are a bane for developing investment culture in india
    Infact more than a uid we need a udemat to hold all sort of securities . including post and nps moneys.. and it should cost next to nothing . help govt track investment for taxes.. then there will be interest as the small man on the streets finds fixed charges a burden instead of % based charges..and the 15 u quoted is the lowest rat icici etc charge more

    lets see what happens now that the ex nsdl and sebi chief is out ..

  • Yeshu says:

    >I recently heard about HDFC Bank Investment Services account for buying and selling mutual funds online. The biggest advantage I see is the convenience of having all the portfolio details at one location.

    They don't mention anything about transaction fees but an account maintenance fee. Am I missing something ?

    Are there other similar service providers ?