Sameer is new to mutual funds investment, but what he’s read around through different articles in media and online, that this is the best tool to create wealth in long term.
This attracted him towards this product and he wanted to start with a SIP as a first step. His friends suggested him a convenient way to get this done by getting a demat account opened which is being offered by the bank where they have salary accounts with. This as per them is the easy, less troublesome, paperless way to invest and manage mutual funds holdings. Moreover this will also help in buying other financial instruments and one can have single view account of all the financial products.
Being in IT sector this looks fine to Sameer too, but while searching for good mutual funds he happened to visit some financial planner’s websites too, so he decided to have their opinion on this.
He met one of the planners at mutually convenient time and floated specific questions to him.
1.) Is having demat account mandatory to invest in Mutual funds? Or is it wise to open a demat account for mutual funds purchases?
2.) What are the other “convenient” ways of investing in mutual funds and which are cost effective too?
3.) How having demat account helps in better financial management from financial planning perspective?
4.) Does he (financial planner) advice his clients to open demat account and if yes, in which companies?
Financial planner started with a big NO. It’s not mandatory to have demat to invest in mutual funds. However whether it’s wise or not to open demat account, totally depends on investors’ requirement and understanding of the product.
Demat account is compulsory to trade in equity shares., but these days due to advancement in technology stock exchanges came up with their platform for Mutual funds investments, so for associated benefits these depository participants have also started offering transactions in mutual funds, along with other products like NPS, Bonds, corporate FDs etc.
While in case of products other than mutual funds, if you buy in physical form you need to safeguard the certificates issued against those investments. But in case of mutual funds this is not the case. When you buy mutual funds, what you will be given with are some units, which get displayed in a statement. You can generate the mutual fund statement through AMC offices and even from your online login if you have, whenever you want. So unlike shares and bond certificates you need not to be worried on safeguarding of mutual fund units.
Demat account do offer some benefits like simplifying the process of transmission of units to nominee in case of accountholder’s demise, single statement to view all holdings and may be some others too which a demat account seller may better explain, but from financial planning perspective there are some flaws. And also from investment management perspective there are many other cost effective mechanisms available which investor must look at.
Below are some of them
- Demat Complicate Estate Planning:
Though it is true that nominee would have to deal with a single entity to get the complete investments transmitted in case of investor’s demise, but this is also true that having a single nominee sometimes complicate the complete estate planning concept.
If you are a small family and have single legal heir, then this benefit is there. But what if you want to distribute or bequeath your wealth to different persons in family and that too in different proportions?
Writing a WILL is one thing but executing a will properly and amicably requires your financial investments and nominations to be in order. It is always advisable to have nominees as per your distribution intention. Even in small family structure you may want to bequeath some portion of financial assets to your children and part portion to your spouse. Now that is not possible with having a single nomination.
Besides nomination, in demat account the unit holding also has restrictions. Say for instance you want to hold some mutual funds jointly with your spouse, but you have demat account in single name, then you have to open a new demat account for joint holding.
From estate planning angle, sometimes it is advisable to have joint holding with your spouse, your kids, but demat account will not give you liberty to choose the holding pattern you want in different investments.
Purchasing mutual funds through demat account are not devoid of charges. There are annual charges that you pay to maintain this account. Many depository participants have “opted in” for transaction charges, which are Rs 150 for first time investor and Rs 100 for existing investor. These charges are levied on every purchase transaction above Rs 10000/-
- No direct option:
In the era of direct mutual funds where you can chose to go direct and invest sans distributor and save on commission costs, these demat accounts doesn’t provide that facility to go direct. ( Read: Invest direct, but financial planning way)
All your investments made through demat accounts go into Regular mode and you will be charged commission for that in the form of higher expense ratio. You may count this as charges you pay to invest through demat account, as you are paying commission just for using the electronic platform
- No advisory:
If you understand that displaying the list of high performing and highly rated funds is not an advisory, then you would agree that these demat accounts does not offer any kind of advisory services.
Moreover advisory is not about just investing in mutual funds, it is much more detailed subject that covers your complete financial life and recommendations on your cash flow management, loans, taxes, estate, insurance and of course investments too. It is something personal which these faceless platforms cannot provide.
All you were provided with a platform where you can buy and sell the mutual funds, and some other financial investment products and keep on paying these depository participants heavy charges in the form of commissions and transaction fee, without getting any advisory on overall financial wellbeing.
There are some depository participants which offer financial planning services but on extra costs. It is also imperative for investors to check if they are getting advice from professional registered investment advisors.(Read: Is your Investment adviser, Registered with SEBI?)
This is not all, there are some demat accounts where investors don’t get SWP (Systematic Withdrawal) and STP (Systematic Transfer facility), which is very much required for better investment and retirement planning.
What should investors do?
One single product or platform cannot be a solution to all the financial requirements. One has to have a proper structure at place by using different alternatives available, which not only should answer the financial management requirements but should also be cost effective.
Demat account do offers a facility to keep and maintain many financial instruments at a single place but it may not suit your planning necessities. There are many other platforms or ways which can provide you a single view report at very nominal costs.
Now days even NSDL provides single detailed statement of all your stock and mutual funds holdings, Cams issues Consolidated Account Statement every six months (CAS) which carries all the holdings and that too with details of different holdings patterns.
SEBI is striving for high transparency in this mutual funds investment space. Now it is very easy to track what you are paying and whom you are paying? This makes it easy for you to evaluate if you are getting services as expected or are the services you are getting worth paying this much of cost.
If it’s all about buying mutual funds and you are fine with paying the charges and commission without a detailed advisory then yes Demat accounts can be termed as a better and convenient option. But if it’s about investing with a planning approach with calculated costs and professional advisory then you better go with professional advisors and financial planner and use other cost effective platforms.