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Monday, June 17, 2019

Holding Mutual Funds in Demat Vs SOA Format

Mutual Funds can be held either in de-materialized account or as statement of account (SOA). Both forms are digitized. There are no paper certificates. Then, how do we know which form is better for us.

Demat units are held in your demat account with your depository participant (DP). SOA Units are held by your fund house and the statement of accounts is issued to you (which is the equivalent of your share certificate)

What is Statement of Accounts (SOA)
SOA is an improvised physical holdings method. This form of holding is similar to holding of securities in demat form. However, it is not exactly identical. It is a Statement issued by the fund house which certifies your holding of the units.

Each of the formats (Demat and SOA) have their own merits and demerits.

Merits of holding MF Units in Demat Account
1/ Single Platform
Statement of Account is exclusively for mutual funds while in a demat account your complete financial portfolio, including equities, mutual funds, debt instruments including NCDs can be tracked all through a single platform. This option helps those who already have demat accounts and want a single statement for all capital market holdings.
2/ Mandatory for ETFs
If you buy Exchange Traded Funds (ETFs) frequently, holding mutual funds in demat form makes sense as these securities can be bought and sold only through the exchanges and for that demat account is a must.
3/ Super Easy Transfers
Transfer of Securities from one demat account to other is super easy. This account is extremely useful in case when units are to be transferred from one person to the other e.g. in case of a deceased unit holder's folio to his or her legal heir. The demat account facilitates unit transfer through the mechanism referred as off-market transfer. All that the concerned beneficiary has to do is open a new demat account in his name, provide a copy of the deceased unit holder's will, death certificate together with other requisite documents and get the units transferred. 

Merits of holding MF Units as SOA
1/ Detailed Fund Information
SoA gives detailed information with respect to transactions in a particular scheme, and provides all such details including the current investment value of the individual's folio, load charges etc. which are not given in a demat account.
2/ Good for Liquid Funds
When it comes to liquid funds, holding units in SOA mode is advantageous as the crediting and thereafter the redemption of units by way of debiting takes time in case of demat format as it is executed at the DP's end.The liquid funds held in SOA format facilitate buying and selling on the same day. Many large investors park money in a liquid fund for overnight duration only. If you buy liquid funds before 2pm, you get the day before’s net asset value. And if you sell the same units before 3pm on the same day, you will get money the next day, at previous day’s (today’s) net asset value. The delay and difficulty in reconciling the books on a daily basis is also the reason why daily dividend plans of liquid funds are also not available in demat mode. There is no such problem if you hold units in SOA format. 
3/ Zero Brokerage
Holding mutual fund units in demat form results in more intermediaries. First, there will be a demat provider, then the clearing house, next the bank and lastly the stock exchange. This will automatically make transactions costlier. Transactions through brokers involve a yearly demat fee of Rs 300-500 and a brokerage every time you transact. The brokerage could be more than 0.05 per cent per transaction. There is no brokerage here in SOA Format.
4/ Multiple Folios, SWP etc
You cannot have multiple folios and use options such as systematic withdrawal or systematic transfer and daily, weekly or fortnightly dividends when in demat format. Its default in SOA Format. Besides, schemes of not all fund houses are available on demat exchange platforms. For instance, on the NSE, schemes of only 30 out of 43 fund houses are available, while only 29 fund houses are linked to the BSE.
5/ Joint Account
If someone wishes to hold some mutual funds jointly with their spouse and some on single holding basis then they should have a separate demat account for holding the same jointly and on single basis. In SOA Format, this is a default feature.
6/ Will
It is quite likely that an individual would like to bequeath a part of his holdings to his or her spouse and rest to the children. In such situations holding mutual funds in demat form can give rise to more difficulties and thus jeopardize the financial planning perspective of the person.
7/ Direct Option
Holding mutual funds in demat form, denies direct options. Those who choose to invest in mutual funds directly are not constrained and also save on commission costs. It is a cost to the investor just for the benefit of using the electronic platform. This benefit per se is inconsequential and does not add value to the investment.
8/ Advisory Services
Mutual fund demat accounts do not offer any advisory services. It is just a platform where one can buy and sell mutual funds smoothly albeit some cost.
9/ Partial Numbers
Demat accounts store equity shares which come in Whole number (X) whereas mutual fund units are allotted up to 3 places of Decimals (XX.xxx)*. So when MF units are stored in Demat accounts with decimal places, at the time of redemption, you will never be able to sell ALL units since most Brokerage sites cannot handle decimal places in SELL option. You can only SELL the units in whole numbers.

How to convert Mutual Funds to Demat Form and vice versa?
You can convert mutual fund units into demat form (from SOA format) by submitting a conversion request form which you can get from your broker or depository (NSDL or CDSL). After verification, the depository will send the form to the asset management company or its registrar and transfer agent, or RTA, which will confirm the conversion request after verification. After conversion, all subscriptions/redemption will have to be routed through the broker. The broker will buy units on the stock exchange platform and credit them to your demat account.
You can also convert Mutual Funds from demat to SOA. You need to ask your DP for the form for conversion of Mutual Fund from demat to SOA. The form is called Annexure C

The words 'demat' mode gives the incorrect impression of security and convenience. Opening a demat account for mutual funds is fine for those who want to have a quick overview of their holdings. Other than this, demat accounts for mutual funds offer very little benefits while charging investors for transactions. For a proper financial plan to be drawn up and implemented, a demat account for mutual funds would perhaps look out of place. 
In nutshell, if you already have a demat account and are also using it for MFs, you may keep using. But if you are opening up new SIPs with new fund house, SOA is likely to serve you better.


Manoj Arora


  1. Hello, just wanted to mention, I enjoyed this post. It was practical.
    Keep on posting!