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Pros and cons of dematerializing mutual fund units

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We have all heard the adage “Life is unpredictable” and are reminded of this reality by some shocking incident every now and then. In the event of the sudden death of a primary breadwinner, imagine if the deceased’s family has to run from pillar to post to get their finances sorted. Mutual funds, which are currently the most preferred investment vehicle for retail investors, also come with their own set of challenges in case of transmission of investments to the nominees in case of the sudden death of the unitholder. With changes in regulation as well as ever-evolving technology, it is now possible to buy and sell MF units on the exchange. By transferring your MF units to your demat account, the hassle of transmission becomes a lot lesser. However, the demat format, too, comes with its own set of pros and cons.

Advantages

• Easier Estate Planning: Since all the investments are held in a demat account, it makes the estate planning process for investors really simple; all one has to do is to mention the demat account number in the will.

• Nomination: Investors can nominate up to three people in proportions of the choice, seamlessly, in the demat account.

• Convenience: One will be able to view all investment holdings, from stocks to mutual funds, in one place. There’s no hassle of maintaining multiple accounts and , in any unforeseen circumstances, the family of the deceased will be able to access all data.

• Hassle-free: Investors can easily change the bank account, email id, mobile number, address or even nomination: all one has to do is send a communication to the effect to the depository, or broking house, managing the demat account.

• Near zero cost: Some broking houses have now started to offer zero annual maintenance charges on demat accounts. Earlier, these charges proved to be a bit restrictive.

Disadvantages

• Redemption: When MF holdings are in demat mode, one can redeem the investments in units, not in currency form. Investors will not be able to redeem the exact amount required and can end up with either a higher or a lower amount, based on the units that they want to redeem.

• SWP: Systematic Withdrawal Plan is an option wherein an investor withdraws a fixed amount of funds from the mutual fund corpus at a recurring frequency, generally monthly. In case the investment is in a demat account, the SWP will have to be done in units and this will result in uneven withdrawal amounts every time. Similar is the case with STP or Systematic Transfer Plan, which is used to transfer the amount accumulated from one scheme to another scheme.

Generally, this mechanism is used by investors to transfer their investments from liquid funds to an equity scheme. Since, only the number of units can be specified, one might end up transferring an uneven amount to the equity scheme each time.

• Nomination: This can be both advantageous and disadvantageous. As of today, an individual can have three nominations in the demat account. But, it is not possible to have different nominees for different accounts or folios.

Since dematerialization of mutual fund units comes with its own pros and cons, investors can decide to have a demat account for their mutual fund holdings as well depending on their requirements and necessities.

For dematerialization of the mutual fund units, one needs to get a conversion request form from the depository participant (DP), fill in the details and submit it to the broker. The mode of holding has to remain the same. For e.g., if the investment is held in the name of Mr. Alpha, as first holder, and Ms. Beta, as the second holder, then the demat has to also be in the same name combination. It cannot be different.

Juzer Gabajiwala is director at Ventura Securities.

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