Do You Need a Demat Account to Invest in Mutual Funds

Mutual funds are among the most accessible and popular investment options for Indian investors, offering professional management, diversification, and flexibility. They can be purchased through various channels — directly from Asset Management Companies (AMCs), via financial distributors, or through stock exchanges.

One common question many investors have is whether they need a demat account to invest in mutual funds. The answer is not a simple “yes” or “no” — it depends on the mode of investment you choose.

A demat account becomes necessary for mutual fund investments primarily when you invest in Exchange Traded Funds (ETFs) or when you choose to buy and sell mutual fund units through the stock exchange platform.

1. Exchange Traded Funds (ETFs)

ETFs are mutual fund schemes whose units are traded on stock exchanges like shares. Since they are marketable securities, you need:

• A trading account with a registered stockbroker
  

• A demat account to hold the ETF units in electronic form
  

2. Exchange Platform Transactions

Some investors prefer to transact in mutual funds through BSE StAR MF or NSE NMF II — platforms connected to the stock exchange. When using these, especially via a broker, mutual fund units may be credited to your demat account; however, in many cases, they are also held in SOA form, depending on the distributor’s arrangement.

If you invest directly with the AMC (via its website, mobile app, or branch) or through mutual fund distributors without using a stock exchange platform, a demat account is not mandatory. In these cases:

• Your units are held in Statement of Account (SOA) form with the AMC’s registrar (CAMS, KFintech, etc.)
  

• You can track holdings via the AMC or registrar portals without using a demat account
  

This mode is called the physical (non-demat) form of mutual fund holding, though the records are still electronic.

Here are some key benefits of holding your mutual funds in demat form:

1. Single Portfolio View
   A demat account lets you track equities, ETFs, bonds, and mutual funds in one place, simplifying portfolio management.
   

2. Ease of Transaction
   Buying and selling units through your trading account can be quicker if you are already familiar with stock market platforms.
   

3. Faster Settlement for ETFs
   Since ETFs settle like shares, the demat route offers streamlined processing.
   

4. Transferability
   Mutual fund units in demat form can be transferred to another demat account (subject to regulatory norms).

There may be a few drawbacks to be aware of when using a demat account for mutual funds:

1. AMC Charges
   Maintaining a demat account involves an annual fee, which can be a recurring cost, especially for small portfolios.
   

2. Dependency on Broker
   Transactions in demat-held mutual funds are usually routed through your broker, limiting direct interaction with the AMC.
   

3. No Direct AMC Benefits
   Certain AMC-specific features (like special SIP dates or direct plan options) may be more accessible through the AMC portal.
   

4. Not Always Necessary
   For investors focused solely on mutual funds and not on shares or ETFs, a demat account may add costs without significant benefits.

Weigh these factors before choosing the demat route:

• Your Investment Style:
  If you actively trade ETFs or stocks, having mutual funds in the same demat account may be convenient.
  

• Cost Considerations:
  Compare the AMC of the demat account with potential convenience benefits.
  

• Consolidation Preference:
  Decide if you prefer all holdings in one account or are comfortable maintaining separate AMC-based folios.
  

• Platform Features:
  Some broker platforms offer advanced tracking, analytics, and consolidated reporting for demat-held mutual funds.

SEBI regulations allow mutual fund units to be held in both demat and non-demat forms. Investors have the flexibility to choose their preferred mode of holding at the time of investment.

Brokers and distributors are required to:

• Disclose all applicable charges, including demat AMC
  

• Provide clear instructions for switching between demat and non-demat modes, if requested
  

• Ensure investor consent before converting existing units to demat form

If you initially invest without a demat account but later want to consolidate holdings in one, you can convert mutual fund units to demat form by submitting a Conversion Request Form (CRF) through your DP.

Conversely, you can rematerialise demat-held mutual fund units back to SOA form through a Rematerialisation Request Form (RRF) if you prefer direct AMC holding.

A demat account is not always required to invest in mutual funds. It becomes necessary mainly for ETFs and when using exchange-based investment platforms. For other mutual fund transactions, holding units in non-demat form through the AMC or registrar is equally valid and can be cost-effective.

Choosing between the two depends on your broader investment strategy, preferred transaction channel, and the importance of having a consolidated portfolio view. Always compare the benefits and costs before deciding, and be aware of the applicable charges and processes for each mode.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.