When you buy mutual fund units, you can choose between getting your units in a statement of account (SOA) or in your demat account. Both forms are digitized; there are no paper certificates. But the demat units are held in your demat account with your depository participant (DP). Which one should you go for?
Buying on stock exchanges
In December 2009, when mutual funds first started being made available on stock exchanges, thanks to a ruling by the Securities and Exchange Board of India’s (Sebi), units were available only in demat format if you bought them from stock exchanges. But since the demand for demat units was low, Sebi eventually allowed investors to buy units in SOA format too, from exchanges.
Buying mutual fund units in the demat mode makes sense if you buy exchange-traded funds (ETFs) frequently. Since ETFs can only be bought and sold on stock exchanges, having a demat account is a must.
Transmission of mutual fund units (say, transfer of mutual fund units to a legal heir of a deceased unitholder) is easier with demat units. All the legal heir needs to do is open a new demat account in her name, submit the death certificate and a copy of the deceased unitholder’s Will and other required documents, and get the units transferred to the new demat account. If you hold units in SOA format, you would need to submit the documents to as many registrar and transfer agents (RTAs) and handle your various funds’ back office operations.
Where SOA scores over demat
Till about a year or so back, liquid funds were not available on stock exchanges through the demat mode. Now, liquid funds are available in demat mode, but you cannot buy and sell the units in a single day. Many large investors park money in a liquid fund for overnight duration only. If you buy liquid funds before 2pm, you get the day before’s net asset value. And if you sell the same units before 3pm on the same day, you will get money the next day, at previous day’s (today’s) net asset value. In the demat mode, the crediting of units and the subsequent debiting of units takes time since it happens at the depository participant’s end.
You can, however, buy a liquid fund in an SOA format on the stock exchange and then buy and sell the same day in the SOA format.
The operation is tedious for demat holdings, as units and money go through the stock broker’s pool account. The broker has to reconcile the accounts on a daily basis to segregate investors’ units and monies on a daily basis.
The delay and difficulty in reconciling the books on a daily basis is also the reason why daily dividend plans of liquid funds are also not available in demat mode. There is no such problem if you hold units in SOA format.
If you hold units in demat, you also cannot do a systematic transfer plan. Some brokers (on their own) offer systematic withdrawal plan, but not everyone. Systematic investment plans (SIP) and switches (between schemes of same fund house), though, are permitted in demat holdings.
Earlier, buying mutual fund units in demat form used to make sense if you already had a demat account and bought and sold equity shares of companies, as also bonds and non-convertible debentures. In that case, your demat account statement offered a consolidated view of all holdings. But from 2015, you get a consolidated account statement (CAS) for all your securities holdings, including mutual funds, irrespective of whether the latter are dematerialised or not.
An alternative to the liquid fund’s demat holding conundrum is a liquid exchange-traded fund. Here, you can avail daily dividend plans and buy and sell the same day.