Dematerialization is the process by which a customer’s physical certificates may be transformed into electronic balances. This can be done at the request of the customer. Investors who want to dematerialize their shares must open an account with a depository participant (DP). Such an account is called a demat account. They are necessary to invest in stock markets. But are they required for mutual funds? Let us find out.
What is a demat account?
If you are relatively new to the field of trading stocks, you may not be familiar with the pre-demat account era. This was a period when shares and securities were “physically” maintained, meaning that they were kept in the form of certificates and sheets of paper. Imagine that: millions of reams of paper being held upon by hundreds of thousands of investors.
We have successfully transitioned into the paperless period known as the demat era thanks to the internet and, of course, computers. Investors may now store their stocks in an electronic form known as a demat account, which eliminates the need to deal with the cumbersome paperwork that was previously required.
Consider this account as the equivalent of a bank account, which holds your money. This account similarly holds your securities. Shares and stocks are transferred electronically to your account.
India began the transition to the dematerialized system in 1996. The Depository Act was passed in the same year and allowed for the setting up of depositories (like the NSDL and CDSL) that would hold such accounts. The NSDL (National Securities Depository Limited) came up in the same year and allowed for India’s first dematerialized accounts on par with global standards.
Is a demat account required for mutual funds?
You do not need a demat account in order to purchase, sell, or manage your mutual funds, to provide you with an answer to this topic in a nutshell. For investments in the stock market, having a demat account is necessary, but thanks to advances in technology, having a demat account is no longer required for investments in mutual funds, including SIPs.
Any mutual fund scheme is available for direct purchase and sale via an asset management company (AMC), a bank, a personal financial adviser, or a variety of third-party websites.
Requirements to invest in a mutual fund
Mutual fund Investment is a simple process, and may even be completed in a matter of minutes and a few clicks online. However, just like every other kind of financial transaction, there is paperwork associated with this one as well. It is crucial to provide the appropriate documentation since doing so helps avoid fraudulent agreements, and eliminates the possibility of tax issues. If you have decided to purchase an investment in a mutual fund, the papers that are necessary to do so are going to be discussed below.
Application form: If you want to invest in a mutual fund, you may have to fill out more than one application form. The first step would be to create an account with the mutual fund, you would need to fill out a different form if you chose to participate in a SIP plan offered by the fund, and if you wanted to make an electronic transfer from your bank account, you would need to fill out an ECS form as well. It is possible that extra forms, such as a Risk Profile form, will be required by some Asset Management Companies.
Compliance with KYC Requirements: For you to be allowed to invest in mutual funds, the Know Your Customer (KYC) regulations established by the Government of India require that your Permanent Account Number (PAN) be validated. Through the website of CDSL Ventures Limited, you can verify that you are in compliance with KYC requirements or register yourself for KYC (CVL). You are required to send either the KYC acknowledgement letter or a copy of the KYC-compliance page if you have previously shown that you comply with KYC.
Even though it is not mandatory for mutual fund investments, it is a good idea to open one regardless since it is also helpful to maintain accurate track of all of an individual’s assets in one location, whether those investments are in bonds, mutual funds, exchange-traded funds, or shares of publicly listed companies.