Do I need a demat account to invest in mutual funds?

What is a demat and a trading account?

Dematerialised account generally referred to as demat account, which is an account that holds all the investments in financial securities and instruments such as shares, bonds, corporate deposits, mutual funds, ETFs etc. in electronic format. Just as a bank account holds our money in an electronic form allowing us to hold, transact and withdraw money anytime, demat accounts let investors in financial securities hold, view and withdraw their portfolio under one account. Trading account holds the money transferred from your bank account in order to buy and sell securities on exchanges. There is a minimum balance needed to be maintained in trading accounts over and above the value of investments being made. Entities issuing and holding our demat plus trading accounts are called Depository Participants (DP). An annual fee is collected by DPs to maintain our accounts.

Do I need a demat account to invest in mutual funds?

No. It is not mandatory to have a demat account to invest in mutual funds in many countries. Demat account is mandatory for transacting on the stock exchanges directly. Hence, if an investor decides to invest in mutual funds through a broker or distributor or the mutual fund house (AMC) he doesn’t require to have a demat account.

Why A Demat Account Is Unnecessary For Investing In Mutual Funds

Although an investor might choose to open a demat account before starting a SIP or MF, but its not advisable to do so especially if you are not going to deal with stocks and derivatives directly. One is charged an annual fees along with a certain commission on every transaction done using demat account, which can be avoided by small time investors. Another disadvantage of investing in Mutual Funds through demat account is that you can't buy direct mutual fund schemes, and are forced to go for regular MFs. Read more about Difference Between A Direct Plan And Regular Plan In Mutual Fund.

Bottom Line:
It is a myth that demat accounts is required for Mutual funds or SIPs, and one should resist the temptation of opening a Demat account until he/she wishes to be an active equity investor.

Read More:
Difference between open ended and closed ended mutual funds
What are the charges involved in investing in a mutual fund? Expense ratio, Entry Loan, Exit load
Knowing what to select: Dividend option or Growth option

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