The Indian mutual fund industry has seen significant growth in recent times, captivating the country’s masses and becoming a major avenue for investments. In fact, in just the first two months of the current fiscal year (FY25), the mutual fund (MF) sector has added an astounding 81 lakh investor accounts. According to the latest reports from the Association of Mutual Funds in India (AMFI), the total mutual fund folios of the industry reached a monumental 18.6 crore at the end of May. These numbers paint a vivid picture: the Indian MF sector is flourishing and reaching unprecedented milestones.
Now, as MFs become the talk of the town, drawing attention from every corner of India’s thriving population, it’s imperative for investors to gain a clearer understanding of holding MF units.In Mint’s new video series, Money Shots, Neil Borate, Deputy Editor at Mint, explains two ways of storing MF units: in a statement of account (SOA) or a demat account.As we dive into this further, we’ll take a closer look at the distinct features of the two methods, discuss their advantages and drawbacks, and help investors make informed choices.
When it comes to holding mutual fund units, investors have two clear choices: the Statement of Account (SOA) with an asset management company (AMC) or a demat account with depositories such as Central Depository Services Ltd (CDSL) or National Securities Depositories Ltd (NSDL). The SOA is the more traditional, paper-based record-keeping system, more commonly known as the physical format. On the other hand, demand is the electric format for holding MF units.
The two different MF unit storage methods come with individual characteristics and qualities. Understanding both can be the key to making sound financial decisions based on personal investment strategy and convenience. In an SOA, you can redeem MF units by specifying the exact amount in rupees, based on the value of the unit, that you want to withdraw. Whereas in a demat account, investors can buy or sell only in terms of units. This can prove to be troublesome for investors since a unit's value can change daily. For example, if the value of 10 units is ₹10,000 today, it could rise to ₹12,000 or fall to ₹8,000 depending on market fluctuations.
Similarly, another drawback of the demat format is that it does not support systematic transfer plans (STP) or systematic withdrawal plans (SWP). STP allows investors to shift seamlessly from one mutual fund to another of the same AMC without redeeming the funds, such as from a specific liquid fund to a mid-cap fund. SWP enables investors to withdraw money at defined intervals, as opposed to a systematic investment plan (SIP), where you invest a particular amount monthly or quarterly.
Another critical distinction between the two methods can be made in terms of fees and charges. When it comes to additional expenditures, SOA is simply the more cost-friendly option. Maintaining an SOA account is free, whereas a Demat account may involve account opening fees, transaction fees, and even annual maintenance charges.
However, a Demat account has its own unique benefits. Investors can use the demat method to hold a list of key assets such as bonds, shares, and ETFs. While an SOA allows you to download an electronic consolidated account statement (e-CAS) of all your holdings in one place, a demat account enables you to track your assets in real-time. Furthermore, a significant advantage of demat accounts is the ease of transferring assets. A single nomination works for the entire gamut of assets in a demat account. In contrast, with an SOA, you must enter a nomination for each AMC. Transferring units is also easier if they are held in a demat format.
What’s more, keeping mutual funds in a Demat account is highly convenient for short-term traders. Traders can pledge MF units and obtain a margin loan against them, which can only be used to buy securities for the demat account. On the other hand, SOA is the better choice for investors regarding loans. Investors can take loans against MF units even if they are in SOA form, and the money can be used for any purpose. This offers greater flexibility compared to loans against demat accounts.
Lastly, the SOA method makes such shifts irrelevant if an investor changes brokers or distributors. The same SOA continues, and only the distributor code changes. However, MF units held in a particular demat account cannot be easily transferred to another demat account linked to a different broker, as this involves considerable paperwork and effort.
Both the SOA and demat methods of holding MF units have their own unique advantages and drawbacks, catering to diverse investor needs. By understanding their distinctive features, investors can choose the option that aligns best with their individual financial goals and investment ideas. We can see that the SOA method provides greater cost efficiency and higher withdrawal flexibility, whereas the demat method offers real-time tracking and ease of asset transfer. As the vibrant Indian mutual fund industry thrives, choosing the ideal method to hold your MF units can be essential to maximising your investment experience.
