Mutual Funds is one of the most popular modes of investing in the stock exchanges and share market for the retail investor who does not have much knowledge of investing in stock exchanges and how the shares and securities market functions.
Let’s start with understanding what mutual funds and Demat accounts are and how to do the work.
What is a Mutual Fund?
A Mutual Fund is a financial product which pools or accumulates funds from multiple investors to invest in securities and other financial instruments. Mutual funds are managed, and investments through mutual funds are handled by professionals who have in-depth knowledge and experience of the stock, securities and financial markets.
The investors of Mutual Funds are allotted units and a particular Net Asset Value (NAV), and the NAV increases or decreases depending upon the performance of the Mutual Fund. The rise and fall of the NAV is an essential indicator of the performance of the mutual funds for the investor, which in turn impacts their returns on investment.
An investor, depending upon their long-term investment objectives and risk appetite of the investor. Some of the different types of mutual funds are mention below.
- Equity Funds
- Debt Funds
- Money Market Funds
- Index Funds
- Balanced Funds
- Income Funds
- Funds of Funds
- Speciality Funds
- Open-Ended Funds
- Close Ended Funds
- Interval Funds
- Tax Saving Funds (ELSS)
- Liquid Funds
- Fixed Maturity Funds
- Pension Funds
- Global Funds
- Real Estate Funds
A mutual fund also is a combination of two or more different types of funds mentioned above. Generally, mutual funds are categorized based upon their structure, asset class, investment objective, based on specialty, risk etc.
How to Select a Mutual Fund Suitable for You
With so many options available in the market, and have limited to no knowledge how the capital, finance, and the securities markets function, investing mutual funds can be a daunting task for many retail investors. The simplest and the most hassle-free way to choose to invest in a mutual fund is to ask your self-what are your investment goals and why are you investing in a mutual fund. Asking this question is mostly like also provide you with the answer which mutual fund is more suitable for you.
For instance, if you have a low-risk appetite, in such case Debt funds suit your need the best, though the drawback of debt funds is, even though these are a comparatively low-risk investment, they provide lower returns as compared to an equity fund. Also, if you have in-depth knowledge of a particular sector, and have a feeling that a specific industry is going to do well in the coming year, you can invest speciality funds which invest in a particular sector, let’s say the technology sector.
Now we have understood what a mutual fund is, lets us understand what a Demat account is and how can we use a Demat account to buy mutual funds.
What is a Demat Account?
Demat account or a dematerialised account is a form of account used to hold, trade and transact shares and securities in electronic form. While trading in stocks and securities online, shares and securities are purchased and held in a Demat account, and thereby facilitating an easy trade for the users. A Demat account can hold all forms on securities investments such as shares, exchange -funds, bonds government securities, and mutual funds in one single place.
As per a recent SEB notification issued on June 8, 2018, all share certificates held in physical form will be deemed as a worthless piece of paper if they are not dematerialised. According to the said notification, share certificates cannot be transferred from 5th December onwards unless they are converted into a dematerialised form, except share certificates held under the will of upon a shareholders death.
Hence it is mandatory for every one holding, trading or dealing in shares, stocks, financial products to have open a Demat Account and have their financial assets dematerialised and held them in their Demat Accounts.
How to Open a Demat Account
A Demat account can hold all forms on securities investments such as shares, exchange -funds, bonds government securities, and mutual funds in one single place. Many banks and DPs are now offering investors an option of an Online Demat account
You can open a free Demat account using the below-mentioned steps.
- You need to contact a Depository Participant, who is registered with SEBI and fill an account opening form.
- You can also approach your bank for opening of a Demat account.
- Provide your KYC documents along with a filled application form
- Sign an agreement along with a schedule of charges with the DP/bank. This agreement will provide and mentions the responsibilities and rights of both the account user and the DP.
- You will be provided with a Demat account number, and you can start trading in the stock and financial markets using your free Demat account.
Pros and Cons of Using Demat Account to Buy Mutual Funds Units
- Enables paperless transaction and allows investors to receive a consolidated statement of their investments in shares, mutual funds, securities etc. of all their investments in a single statement.
- Mutual Fund units can be easily and freely transferred from the Demat account of the unitholder to the Demat account of their nominees, with exception to mutual funds which have a lock-in period.
- Transacting through Demat account directly without involving a broker can save the cost of brokerage and other fees brokers levy
- Not all Mutual funds are available on the exchanges.
- Holding mutual funds in a Demat account increases the number of intermediaries, i.e. you have the Demat account provider, clearinghouse, banks and the stock exchange. This can increase the transaction cost.
Buying Mutual Funds using Your Demat Account
Demat account holders can buy, sell and hold mutual fund units with their Demat account and track all your investments in the capital market within a single statement. Investors can convert their existing mutual fund units into dematerialised form with submitting a simple conversion request form to their broker or depository participant. Upon verification, if everything is found in place, your mutual fund units will be dematerialised and transferred to your Demat account.
However, in reality, mutual fund units are held by the RTAs whereas the investor does not hold physical units or any form of unit certificate, but only receive a periodic account statement. Hence converting mutual fund units into dematerialised form might be a futile exercise and might not hold many benefits to mutual fund unitholder.