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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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‘Demat’ing the Demat

Posted by Muthu on March 20, 2011

Stock brokers are encouraging people to keep mutual fund units in demat form.

You may ask what is wrong with that.

Nothing wrong. But what they fail to tell you is that your mutual fund units are already in demat form. You are NOT currently holding them in physical form.

Welcome to the world of ‘demat’ing the demat.

“ ‘Demat’ing the demat” is a big joke – a tragic joke!

This joke was probably initiated to increase the revenues of broking and depository industry. Or even if the intention was noble, for a person with hammer, everything is a nail. Conditioning!

A share, unit certificate, bond, precious commodities like gold or silver may be ‘demat’ed. However I’m unable to understand why an account statement should be in demat form!

Your mutual fund units are already held by AMCs (Asset Management Companies) in the demat form. What you receive from a mutual fund is not a unit certificate but only an account statement.

Account statement by definition gives you the detail of units held in your name with custodian in demat mode.

So stockbrokers’ saying that they would dematerialize something which is already dematerialized is one big….okay, factual misrepresentation.

Paying commission to a stock broker for every transaction, demat transaction charges, annual maintenance charges are all unnecessary for a mutual fund investor.

A mutual fund investment is an investment product and not a trading one. Stock brokers are generally wired to trade. Don’t blame them. It’s genetic.

If what you are looking at is consolidation of holdings, even recent publication by SEBI in newspapers mentions that an investor can get single consolidated statement of account of all mutual fund holdings. This is precisely what your broker is pitching as “ ‘demat’ing the demat” benefits.

In the months to come, I hope SEBI would advice AMFI as to periodicity and mode of sending such consolidated account statements.

Last week, I happen to speak to many people at mutual fund houses, CFPs and other advisors on this subject. I’ve given below my understanding arising from the above. Since our blogs are read also by people in industry, please write to me if there is any factual error in what I give below.

1)     The consolidated account statement that is being implemented by SEBI would provide you the details of all your holdings. Since your PAN would be the key for providing such consolidated holdings, you would be able to get single statement for investments made even through different advisors.

2)     Every stock broker insist on opening a separate demat account through them. Though this is not legally compulsory, a stock broker, for all practical purposes would not facilitate a transaction unless you open a demat account through him. So whenever you want to change your broker, you would end up having one more demat account. Multiple demat accounts defeats the very purpose of consolidation. The consolidated statement which is mentioned in point (1) above would not happen if you’ve multiple stock brokers.

3)     Again though it is not legally compulsory, a stock broker normally insist on a power of attorney (POA) to be signed by you authorizing him to buy or sell on your behalf. All of us know about instances of POA being misused.

4)     When you go through an advisor, you also have direct relationship to mutual fund house in addition to advisor. This is not possible when you go through a stock broker. For example, if you want to invest in a mutual fund through a broker, the cheque needs to be written in his name and not in the name of fund. The funds would be purchased by the broker in his name in a pool account and then credited to your individual account. Any inefficiency in this process may have impact on your dividend receipt etc. What if he fails to credit to your individual account from his pool and you do not notice or reconcile it?

5)     Since you cease to have relationship with a mutual fund once you go through a broker, if you want to redeem your units, you cannot bypass your broker. You’ve to only redeem through him by paying brokerage. However you can always bypass an advisor and directly go to fund house for redemption, if the advisor refuses to service you.

6)     Since many of you opt for SIP route for building long term wealth, at present SIP is not possible through a broker. Once it becomes possible too, you may end up paying brokerage every month for every single SIP.

7)     If you invest through broker in the name of four individuals in your family, you need to have 4 different demat accounts. Every time you change your broker, 4 more new sets of accounts needs to be opened.

8)     If you make investment in 5 schemes now, each scheme can have a different nominee. If you go through a broker, the nominee by default is the nominee of your demat account. If you want different nominees for different schemes, you may have to open multiple demat accounts each with a separate nominee. So much so for consolidation!

9)     If someone tells you that your contact details can be changed for all schemes at one go through a broker’s demat, the same is possible by updating your KYC details only once through your advisor. The details get updated automatically in all your schemes, even if invested through multiple advisors. Again PAN is the key.

10)  The most important thing is that a broker is not an advisor. He is merely a transaction facilitator.

11) As an advisor, I’ve the facility to review all the investments made by you through us. This helps in periodical review, portfolio analysis, course correction and service. This is not possible in a broker’s demat account.

12) For some of our NRI clients who never visit India, we’ve enabled them to make any additional purchases (top ups), based on our advice, by visiting the mutual fund’s website (some fund houses offer this facility). Since the purchase is made in the folio having our advisor code, we get the access  to the account statement and details for review and service.

13) Since most of our clients are based in Chennai, we are able to personally service them itself. An additional purchase in the same folio just involves writing a cheque and signing the stub. No paper work like initial purchase. If you think personal service is inferior to online, think again. Personal service is reserved for elite in the banking industry through private banking and online banking is for ordinary mortal like me.

14) There have been talks going on for providing online platform for advisors like us. If and when this happens, you would get added advantage of making transactions online through us, based on our advice. Please note that transacting online through an advisor is not same as buying from a broker in demat account. Here the control continues to be with you as in the present form and the units are continued to be held in your name with custodian by mutual funds. Your direct relationship with mutual fund houses would continue to remain intact unlike a broker’s demat where your relationship is restricted only to broker.

15) A personal financial advisor like us deals with and advice on all aspects of your personal finance. Do you think a stock broker would be able to do that? An advisor’s incentive is to build a long term relationship with a client. A broker has a different incentive system which is driven by his short term goals.

From what I read and hear, the regulator has no plans of making it compulsory to demat your mutual fund units (which are already in demat form!).  Broking channel with separate  demat account is only provided as an additional option.

The regulatory head who has taken over recently is a person who understands the industry and investors better. So I feel compulsory individual demating is highly unlikely.

If such an unlikely scenario happens, then only we would advice you for ‘demat’ing the demat. After all we are a small speck in the system and we would then have no option to go with the flow.

Probably the regulator would have figured out by then how to accommodate all the channels (not only broking channel) in the new avatar.

Our suggestion for you now is to continue with the existing system and not go to broking channel.

Also if you buy through an advisor or directly from a fund house, the cost remains the same. It is one another good reason for going through an advisor, though the value you get from a good advisor would be more than the price you may pay.  

If you go through your broker, your cost goes up. Added to that I do not see brokers providing value addition and comprehensive advice, which a competent advisor can.

A long article- but thought I need to share these details with you.

4 Responses to “‘Demat’ing the Demat”

  1. Shuvendu Nath said

    This article is an eye opener for me. But again as a lay man in investment market I stand confused still when I see numerous articles on “Get your MF’s dematerialised in demat accout” that too from every small/big sources once I google. But one cannot find your article easily while in google at first stance. Which one is authentic information DONT KNOW. I do not have any investment as of now but all such informations have made me to thing again before investing anything in this market.

  2. Great Article but write positive side also.It is good to have work in paper less environment now a days.Sebi should remove the bottlenecks and provide a tension free system.

    • Muthu said

      To be honest, I don’t see anything positive. It is like demating the demat account statement we receive for shares. Mutual funds units are already held only in demat form and what is being received is only account statement. Why demat a mere account statement when the units mentioned therein are already in demat form?

      Unless the regulator makes it mandatory or creates an environment for doing the transaction only through the broking channel, I do not see any need for an investor to opt for this.

      I only wish that the regulator and the industry body listen to voices like ours too.

      An online platform to all advisors with a common account statement would be a win-win situation for investors, advisors and AMCs. This would also increase the penetration and reduce expenses.

      Demating the demat would benefit depositories, stock exchanges and its brokers. But what is the benefit for an investor?

      We should think first from an investor perspective. If we get this perspective right, everything else would automatically fall in place.

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