Demat vs. Statement of Accounts: How Do You Store Your Mutual Funds?

Indian mutual fund industry has been experiencing rapid growth becoming a popular investment choice for many people across the country. In just the first two months of the current fiscal year (FY25), the mutual fund sector saw the addition of 81 lakh new investor accounts. According to the latest data from the Association of Mutual Funds in India (AMFI), as of the end of May, the total number of mutual fund accounts (folios) reached 18.6 crore. These figures highlight the growth and milestones achieved by the mutual fund industry in India.

As mutual funds become increasingly popular, it's essential for investors to understand how to hold their mutual fund units. Two main ways to store mutual fund units are in a statement of account (SOA) or a demat account. Let's dive into the details of these two methods, discuss their advantages and disadvantages that can help you make informed decisions.

SOA Vs Demat

When managing mutual fund investments, investors can choose between two primary methods of holding their units: the Statement of Account (SOA) provided by the asset management company (AMC) or holding units in a demat account with depositories like Central Depository Services Ltd (CDSL) or National Securities Depositories Ltd (NSDL).

1. Statement of Account (SOA)

• Format: SOA is a traditional, paper based document.
• Issuance: It is issued by the AMC periodically (e.g., quarterly or annually).
• Contents: Includes details such as the investor's name, folio number, transaction history, unit holdings, NAV (Net Asset Value) and overall valuation of investments.
• Accessibility: Typically mailed to the investor's registered address or available for download from the AMC's website.
• Usage: Useful for investors who prefer physical records or do not engage frequently in trading.

2. Demat Account

• Format: Demat accounts are electronic, much like how shares are held digitally.
• Structure: Managed by depositories (CDSL or NSDL) rather than AMC.
• Benefits: Offers convenience as all holdings are consolidated electronically in one place.
• Transactions: Allows for seamless buying, selling and switching of mutual fund units online.
• Statements: Provides online statements and transaction history, accessible anytime.
• Security: Offers enhanced security against physical loss or damage of certificates.

Key features

Statement of Account (SOA)

In an SOA, you manage your MF investments much like a bank account. You can redeem (withdraw) your MF units by specifying the exact amount in rupees that you want to withdraw. For instance, if you want to withdraw ₹10,000 worth of units and the current value of each unit is ₹100, you would redeem 100 units. This method provides clarity on how much money you will receive when you redeem your units.

Demat Account

Demat account holds your MF units electronically, similar to how stocks are held. Here, you can buy or sell MF units in terms of quantity (units) rather than rupee amounts. The challenge with a demat account is that the value of MF units can fluctuate daily based on market conditions. For example, if you own 10 units valued at ₹10,000 today, this value could rise to ₹12,000 or drop to ₹8,000 tomorrow due to market fluctuations. This makes it important to monitor market trends when buying or selling units.

In a demat account, you can't set up systematic transfer plans (STP) or systematic withdrawal plans (SWP) directly. STP allows you to switch money between different mutual funds of the same company without selling them first. SWP allows you to withdraw money from your investments at regular intervals. This differs from a systematic investment plan where you regularly invest a fixed amount.

Holding an SOA is usually free of cost. On the other hand, a demat account may involve fees for opening the account, charges for transactions like buying or selling stocks or mutual funds and annual maintenance fees.

Advantages and Disadvantages

1. A Demat account helps you keep track of your investments like shares, bonds, and ETFs in real time. It's like a digital vault where all your financial assets are stored electronically. This means you can see current status of your investments whenever you need to, without delays.

2. Demat account is easy it is to transfer your assets. You can use a single nomination for all your holdings within the account. This simplifies things a lot compared to other methods where you might need separate nominations for each asset management company (AMC).

3. If you're someone who trades frequently, a Demat account offers extra benefits. You can pledge your mutual fund units as collateral and get a margin loan against them. This loan can only be used to buy more securities within your Demat account, which can be handy for short term trading strategies.

4. SOA provides a consolidated electronic statement of all your investments across different AMCs. It's like a summary sheet that shows you everything you own in one place, which can be convenient for keeping track of multiple investments.

5. SOAs offer flexibility when it comes to taking loans against your mutual fund units. Even if your units are in SOA form, you can still use them as collateral to get a loan. This gives you more freedom in how you use the borrowed money compared to loans against Demat accounts, which are more restricted.

6. If you decide to change your broker or distributor having your investments in SOA form can make things easier. Your investments remain the same and only the distributor code changes. This simplifies the process compared to transferring mutual fund units between different Demat accounts which can involve more paperwork and effort.

Final Words

When it comes to holding mutual fund units, you have two main options Statement of Account (SOA) and demat account.

SOA method is cost effective and gives you more flexibility when withdrawing your money. On the other hand, using a demat account allows you to track your investments in real time and makes it easier to transfer your assets.

Deciding which method to use depends on what matters most to you whether it's flexibility and cost efficiency or real time tracking and easy transfers. Each method has its strengths, so it's about choosing what suits your financial goals and investment style best.