Mutual funds can be held in a demat account. You could also hold them in a statement of account (SOA) form. In both cases, the holding is in digital mode and there is no physical certificate as such. Here are some of the key factors you should consider before deciding your holding mode.
Are you into ETFs?
If you are keen on investing in ETFs, you should be using a demat account to hold your mutual funds. You can access ETFs through the fund of fund route as well and hold them in SOA format.
The biggest advantage of a demat account is you get to hold most of your financial investments such as shares, mutual funds, bonds and sovereign gold bonds in one account. It makes tracking simple. Consolidated account statement issued by CDSL or NSDL resolves this issue to some extent if you are holding in the SOA form.
Transactions
The biggest advantage of holding units in SOA format is you can transact through multiple means. You can place a redemption request for the units of mutual fund scheme on the website or at the office of the mutual fund company or of the registrar and & transfer agent. You can also transact through distributor platforms or on the transaction platforms such as MF Utility (MFU).
If you are holding units in a demat account then the redemption request need to be initiated by logging into your broking account. You have to make sure that your demat account has the units allotted to you. Typically crediting units of the mutual fund to the demat account takes a few more hours as compared to creation of units in SOA format.
This also means that wherever there is a redemption transaction involved, the investments in demat account face a few limitations. Typically investor can sign up for a systematic investment plan and hold the units in demat account. But systematic transfer plan and systematic withdrawal plans are not allowed in case units are held in demat account. “A few brokers seek an authorization from the investor to that effect and have been offering it. However, as the regulatory landscape evolves, this may change,” says an industry official who is not allowed to speak with media.
Transmission
In case of mutual fund units held in SOA form, each folio is treated as a separate investment and it can have a separate nominee. In case of death of the sole investor, the nominee (or the legal heirs) can approach each fund house and submit transmission request form along with necessary documents.
"Sometimes the WILL mentions the name of beneficiary who may be different from the nominee. In such case too, as there is a Nominee the MF Investment will first get transmitted to the Nominee with onus lying on the Nominee to pass the same on to the beneficiary as per WILL," says Rajat Dutta, Founder & Initiator, Inheritance Needs Services. However in case of MF investments in physical form , if nominee has died and WILL mentions a beneficiary, then the mutual fund will follow a process of transmission basis a Probate which is compulsory irrespective of the value of the MF investment, he adds.
In case of death of one of the joint holders of a mutual fund folio held in SOA form, the surviving joint holders get control of the investments.
In case of mutual fund units held in demat account, upon death of the sole investor, the nominee named for the demat account gets control of all investments. Nominee opens a separate demat account and approach the depository with transmission request. In case of death of one of the joint holders, the surviving joint holders get control of the investments.
In the case of SOA, the investor have the scope for some amount of customization, by naming different individuals as nominees for different folios. But that means the nominees have to deal with each fund house separately. In case of SOA, entire demat account holdings will go to one or more nominees. The investor can define share of each one of them in percentage terms, but cannot specify which investment will go to whom in the nomination form.
Costs
A demat account comes with a yearly fee. It ranges between Rs 250 and Rs 600. SOA on the other hand is free. Depending on your needs you can choose the format to hold on to your mutual fund investments.
