Personal Finance

A demat account isn't just for stocks

Srividhya Sivakumar | Updated on March 19, 2011 Published on March 19, 2011


For 32-year old Ajay, a marketing professional, opening a demat account was never a necessity. After all, aren't demat accounts a ‘must-have' only for those who want to dabble directly in equities? Ajay had instead preferred to route his equity investments through mutual funds. While Ajay may have been right a couple of years ago, he isn't anymore. Times have changed and so have the options and choices associated with demat accounts. From equities to mutual funds to gold to the newly-launched tax-free infrastructure bonds, demat accounts now have many a use. Here's a lowdown on why the likes of Ajaymay need to open a demat account.

Shred the paper

No matter what your typical investment choices are, the need to have a demat account is only set to only increase . While it would allow you to make direct equity investments, both in primary and secondary markets, your demat account can be put to other uses .

For one, you can use it to invest in mutual funds. Instead of routing your mutual fund investments through an agent or through the respective AMC's website, you can subscribe to mutual fund units through your stock broker using the stock exchange platform if you have a demat account.

Just like how it is done with stocks, upon subscription, the asset management company (AMC)/Registrar and Transfer Agent (RTA) will credit the mutual fund units to your demat account. To appease the sceptic in you, know that there are advantages too of doing this. Using the demat account to buy and sell mutual funds allows you to centralise all your investment holdings which is a big advantage any day, especially if you have sweated it out through several MF statements before! ‘Demating' mutual funds investments becomes even more convenient if you have multiple schemes spread across fund houses.

It also doesn't hassle you if your work requires you to shift places frequently. You will need to change the address recorded with your depository participant and it will get registered electronically with all the AMCs and RTA. It saves you the bother of having to correspond with each of them separately!

Not just equities

If equities don't enthuse you as much, fret not. You can use a demat account to get some gold exposure too, thanks to Gold ETFs - there are eight such ETFs listed on the exchanges presently. Though the Gold ETF market in India is still small, it is expected to grow phenomenally in the future . This however isn't to say that you cannot get a gold exposure without a demat account.

There are FoF(Fund of Funds) options that circumvent the need to have a demat account (Kotak and Reliance Gold Funds), which score over Gold ETFs in terms of tracking error and fee structure. But then, you can even do away with the costs of maintaining your demat if you use it to house other investment options too.

You can also use the demat account to hold NSC (National Small Savings Certificate) and KVP (Kisan Vikas Patra). While the option is limited to new investments and is presently not available everywhere, it probably is only a matter of time before it does.

The biggest advantage here is that you needn't go to the post office on redemption, as your bank account will be credited directly or you will receive a warrant at your residence.

Other perks

A demat comes in handy even if you want to invest in public issues of bonds and debentures of companies. For instance, did you know that a demat account was mandatory to invest in the recently concluded State Bank of India's 15-year 9.95 per cent bonds?

What's more, having a demat account would help even if you want to invest in tax-free infrastructure bonds. While IFCI Infrastructure bond and the first tranche of IDFC Infra bond were open to only demat account holders, the bonds that came up later - including the second and the ongoing third tranche from IDFC – opened up to others as well. Interestingly, IDFC opened up the subscription to non-demat account holders too as it felt that the bulk of tax-saving Indian investors weren't necessarily equity investors. Moreover, other tax-saving instruments did not require a compulsory demat.

So, what's the catch?

While you can dematerialise your existing mutual fund holdings and transfer them to your demat account, you cannot do that with your existing NSC and KVP investments.

Even so, the name and pattern of holding in your demat account has to match that of investments. This means joint MF investments cannot be held in your demat account, if you are sole holder.

The other glitch could be the additional costs of maintaining a demat account. While that may seem to add to your investment costs, you can average it out if you use the demat account for its multiple utilities.

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