Do we need a Demat Account for Mutual Funds in India?

Why is a Demat Account Needed for Mutual Funds?

A demat account is an electronic repository for holding securities, including mutual fund units. While it is not essential, many investors opt for it due to the following advantages:

Consolidated Portfolio Management

A  demat account allows investors to manage their mutual funds, stocks, and bonds under a single account, making it easier to track their investments.

Ease of Transactions

Buying, selling, and redeeming mutual fund units becomes seamless and paperless through a demat account.

Enhanced Security

It eliminates the risk of losing physical certificates and ensures safe storage of all investments.

Loan Collateral

Some financial institutions allow investors to use mutual fund units held in a demat account as collateral for loans.
 

Ways to Invest in Mutual Funds

Investors can choose multiple ways to invest in mutual funds, with or without a demat account. Here are the most common methods:

Directly Through AMCs (Asset Management Companies)

Investors can visit the official websites of AMCs and purchase mutual funds directly. This method often comes with lower expense ratios since there are no intermediary commissions. However, investing in multiple AMCs requires managing separate folios for each.

Through Brokers and Financial Advisors

Many investors prefer using brokers or financial advisors who provide guidance and facilitate investments. This method is ideal for those seeking expert advice but may involve additional charges.

Via Online and Offline Distributors

Online platforms like mutual fund aggregators offer a consolidated view of all mutual fund holdings, making it easier to track investments. Offline distributors, such as banks and financial firms, also provide assistance with mutual fund investments.

Using Net Banking

Some banks offer direct mutual fund investment services through their net banking platforms, allowing customers to invest seamlessly without opening a demat account.

Through a Demat Account: Stockbrokers and Depository Participants (DPs) offer demat accounts that allow you to invest in mutual funds along with stocks and bonds. This method provides a one-stop solution for managing multiple asset classes under a single platform, making it easier for investors to track and analyze their overall portfolio performance. 

While a demat account is not required for investing in mutual funds, it can simplify portfolio management and enhance security. Investors should weigh the pros and cons before deciding the best method that suits their investment style. Whether through a demat account or directly via AMCs, mutual funds remain a flexible and accessible investment option for wealth creation.

When is a Demat Account Useful for Mutual Funds?

A demat account is not mandatory for investing in mutual funds, but in certain situations it can make life easier. If you are already an active stock market investor, holding both shares and mutual funds in the same account gives you a consolidated view of your portfolio. It also makes tracking, monitoring, and transacting across asset classes more convenient.

A demat account is especially useful when:

• You prefer a single platform for both equity and mutual fund investments.
• You want to apply for Exchange-Traded Funds (ETFs), which do require a demat account.
• You are someone who actively buys and sells mutual fund units on the exchange, similar to trading shares.

For long-term, SIP-driven investors, having mutual funds in a demat account is optional. But for active traders and those who like everything under one roof, it adds a layer of convenience.

Step-by-step Guide to Buying Mutual Funds Through a Demat Account with 5paisa

If you choose to invest via a demat account, 5paisa makes the process seamless. Here’s how you can do it:

Open a 5paisa Demat Account

Register online with your PAN, Aadhaar, and bank details, and complete your KYC. If you have a 5paisa account, skip this step.

Log in to the 5paisa App or Web Platform

Use your credentials to access the dashboard.

Navigate to Mutual Funds Section

Browse through 5paisa’s wide range of mutual fund schemes.

Choose Your Investment Mode

Pick between SIP (Systematic Investment Plan) or lump sum.

Place the Order

Enter the amount, confirm the transaction, and your mutual fund units will be credited to your demat account.

Track and Manage

Monitor performance, redeem units, or switch between funds directly within the platform.

This integrated route is convenient for investors who like managing stocks, ETFs, and mutual funds in one account.

How to Invest in Mutual Funds Without a Demat Account?

For those who don’t want to open a demat account, there are plenty of alternatives:

• Directly through AMC (Asset Management Company): Visit the fund house’s website, fill in your details, complete e-KYC, and start investing.
• Through Registrar & Transfer Agents (RTAs): Platforms like CAMS and KFintech allow you to invest across multiple fund houses without a demat.
• Via Online Marketplaces and Apps: Fintech platforms and distributors offer paperless onboarding and easy SIP setups.
• Banks and Financial Advisors: Many banks distribute mutual funds and allow you to invest directly via net banking.

In all these options, your mutual fund units are held in statement of account (SoA) form, not in a demat account. You still retain full ownership and can redeem or switch at any time.