Dematting of MF units : Should you go for it?

“Life has become so easy after the share trading has started in demat form” , Said Romesh Acharya, a 32 year old marketing professional, working with a leading FMCG Company. “I am wondering if I should also demat the mutual fund units lying with me ?” he asked his colleague  Kapil Sharma, who is a well informed investor and usually guides Romesh to take all these decisions.

“What is the meaning of dematting of Shares, Romesh ?”, Asked Kapil.

“Earlier when I used to trade in market, I used to deal with physical share certificates. I had to physically count and check the number of shares. Also, there was a risk of Share certificates being fake, or they also had a risk of theft from my own custody. Now, since I have dematerialised them, I don’t have to worry about counting the quantity and also checking the authenticity. I am also free from the risk of the physical certificates getting misplaced or theft from my place. Thus, in totality, it is a very peaceful deal.” Said Romesh.

“I completely agree with you on this. Now just think for two minutes, do you have any such risk with your mutual fund units.

1.You have a statement coming from the registrar of the fund house indicating the number of units you hold. So you don’t really sit and count the number of units you have (which you were doing with physical shares and found troublesome).

2.The Statements can be directly requested from the fund house or its website, so there is no scope of a fake statement having a false figure of units. So in mutual fund units, you don’t even have a risk of unauthenticated units being dumped to you.

3.Finally, even if you happen to misplace the mutual fund account statement, which mentions the number of units held by you, there is no worry. You will again receive a fresh statement in the next quarter which will have all the details. Alternatively you can also request a statement immediately to know your holdings.

So if you look at all these points, you will observe that the benefits which could be available to you in demat, are already available to you for your mutual fund units.” Explained Kapil.

“Ok, I agree with you on all the above points. But Still I have one question. Would there be any disadvantage if I demat my mutual fund units ?” Asked Romesh.

“Now that’s an interesting question”, smiled Kapil, “ The moment you demat your mutual fund units, you forego your right to redeem them directly. You need to compulsorily sell them on an exchange, which would involve transaction costs even while selling; whereas, there is no such cost when you are redeeming your mutual fund units. Also, you need to find a buyer for your mutual fund units on the exchange. Although this might not be a great problem for maximum cases, there might be some occurrences where you do not find a buyer and the units behave like an illiquid assets (which destroys the purpose of investing in mutual funds, as we invest in them as they are one of the most liquid form of assets).”

“So what you are saying is, there are only disadvantages of dematting mutual fund units and there is no advantage of doing so ?”, asked Romesh.

“Well, I am not saying that. So far I just said that you would not get any additional benefits by dematting them, which you were getting in case of shares. So the answer to your question is yes, there are some advantages of dematting of MF units. If you are not a long term investor in mutual funds, and want to trade them like shares, then dematting them is the right strategy for you. You can buy and sell them frequently and make some short term profits and this would be difficult if the units are not in demat form.”  Explained Kapil.

“No Buddy, I am at least that much an informed investor, that I should be a long term investor in mutual funds, in fact overall equity markets, to create wealth for myself. So I would rather not demat my mutual fund units which would rather increase my cost than give me any benefits. Thanks for all this useful information”.

(All the characters in the above article are hypothetical. There resemblance to any person, living or dead, will be purely coincidental)

We look forward to your feedback and comments on the above article. 

The Author Prof. Saurabh Bajaj (BE, MBA, FRM) is Chief Investment Planner at Nidhi Investments. He may be contacted on  saurabh@nidhiinvestments.com for any queries.