DEMAT ? What is DEMAT account ? How to open DEMAT Account ?

Demat account is necessary for investing in mutual funds?

All about MUTUAL Funds

If you are considering mutual fund investments and do not know much about mutual funds here we will give you a comprehensive overview about mutual fund investment. There are many investors who are often in confusion whether they need a demat account to invest in the mutual funds. The answer is “No”.

 You do not need a demat account to invest in mutual funds or sell the units that you have purchased. But of course if you have a demat account you can surely make use of it for investing in mutual funds. But then you might be wondering how to invest in the mutual funds?

How mutual funds operate – Mutual funds are managed by financial institutions, which collect money from the market from retail investors by selling units of the funds through open advertisements at a specific price. Then they invest the collected money
in different types of securities including stocks, bonds and on stock index. The profit and loss of the mutual fund is dependent on the performance of the securities on which the fund invests. Every day after the closing of the financial market the present valuation of the units of the mutual fund is presented through the Net Asset Value or NAV of the fund. NAV shows the current price of the unit that you can get from the institution if you sell of the units.

For investing in the mutual fund you can fill up the application form published by the fund managing company providing them the details. While selling of the units you can simply fill up the form and the money will be deposited either to your bank account directly or the payment will be made to you through cheque. This is the general procedure for investing in the mutual funds.

 There is absolutely no need of any demat account or broker to invest in the mutual funds. But surely if you are having a demat account and an online trading account you can use the facilities to invest in the mutual funds. It will make the process lot easier for you as you won’t need to fill up the application and do all the processing. With just a buying request sent over the online trading account you can invest in the mutual fund. The selling of the mutual fund units through the online trading account is similarly simple.

Different types of mutual funds – There are so many different types of mutual funds in the market. The most common and the most convenient option for mutual fund investment is the Open Ended Funds.

This funds lets you sell the units whenever you want. It is also possible to enter the fund whenever you want but in that case you have to pay the premium that means you have to buy the units at the current NAV of the fund. There are different mutual funds that are categorized on the basis of financial instruments in which they invest.

For example there are mutual funds that invest in stocks but there are different types of such funds. Some funds invest in growth stocks, some invest in specific sectors, and some funds invest in large cap stocks, and so on. There is a recent development in the market of mutual funds that is the Exchange traded funds. These funds basically invest in the index of the stocks exchanges – for example NIFTY and Sensex. The profit and loss of these funds is based on the performance of these indexes.

Like any mode of investment, investing in the mutual funds does have its pros and cons. Mutual funds are basically more secured than stocks market investment. Though the performance of these funds is based on the rise and fall of the stocks, these funds are managed in a manner that the profit and loss is controlled professionally to give you a moderate return. But surely it can never get you the big returns that you can expect to get from the stock market investment. Moreover, you need not have thorough understanding of the stocks market to invest in the mutual funds that is required if you want to invest in the stocks.

General Market Advice:

1. Never chase a stock.

2. Buy when markets are in the grip of panic.

3. Only buy fundamentally strong stocks, which are undervalued.

4. Buy stocks grown in top line and bottom line over the past years.

5. Invest in companies with proven management.

6. Avoid loss-making companies.

7. PE Ratio and Growth in earnings per share are the key.

8. Look for the dividend paying record.

9. Invest in stocks for sure returns.

10. Stocks have been the high yielding asset class over the past.

11. Stocks are an asset class.

12. The basic property of any asset class is to grow.

13. Buy when everyone is selling and sell when everyone buys.

14. Invest a fixed amount each month.

Here are 3 convenient ways to buy mutual funds online:

Asset Management Company (AMC) websites: Most fund companies offer the facility to transact in mutual funds online. You first download the scheme form from the website, fill in your details and submit the same along with the initial cheque, photocopy of PAN card (Permamnent Account Number) and KYC (Know Your Customer) letter. You also need to apply for a personal identification number (PIN) for online transactions.

Once you are assigned a folio number along with the PIN, all subsequent transactions in the folio can be done online using your bank account. However, you need to go through the entire procedure again if you also want to invest in other fund houses. This is the cheapest route for the investor because the facility comes absolutely free. The flip side is remembering 6-7 different PINs for various fund houses; which can be a big headache.

Some of the websites are—

http://www.franklintempletonindia.com/

http://www.hdfcfund.com/

http://www.icicipruamc.com/

http://www.dspblackrock.com/

http://www.birlasunlife.com/

Brokers: Most large brokers are today linked to the NSE or BSE mutual fund exchange platforms. All you have to do is log on to the broker's online trading terminal and select the scheme of your choice from the list of schemes available on the portal. The units will be credited directly to your demat account. You can do an SIP (Systematic Investment Plan) or a lump sum investment as per your wish. The charges are nominal; however they vary from broker to broker.

ICICI Direct, for instance, charges Rs 30 or 1.5% (whichever is lower) of the SIP amount, for investments below Rs 8 lakh. Lump sum investments below this limit attract a flat charge of Rs 100. For those who do not have a demat account, setting one up with a broker will involve various charges such as account opening charge (Rs 250-750), annual maintenance charges (Rs 300-550). Many online brokerages also allow you to map existing MF (mutual funds) investments with your investment account.

There are independent portals like Fundsindia and Fundsupermart; which came into existence in 2009 and have been catering to mutual funds investors to buy and sell online at no extra cost. All you have to do is open an account with them, fill up a form online, take a printout of this pre-filled online form, sign it, attach a copy of your Permanent Account Number (PAN) card and know-your-client (KYC) acknowledgement and send to them. Once this is done, you can buy MFs across 41 fund houses. These portals have tie-ups with the leading banks for seamless online payments. Apart from the zero-cost advantage, these portals offer several additional benefits that provide a friendly, hassle-free experience to the investors. They also provide tools to keep track of your holdings along with in-house research and analysis to help you build the ideal portfolio.

The portfolio of an average retail mutual fund investor is usually a mix of ELSS plans, equity funds and debt funds from four to five fund houses. Keeping track of the paperwork for all these investments can be an onerous task. So, what's the alternative? All mutual fund houses allow investors to view their accounts online, but one needs to log on to individual sites to do this.

Wouldn't it be convenient if one could consolidate all mutual fund holdings in one account? This is possible if you dematerialise your mutual fund units and transfer them to your demat account.

The procedure might seem a little complicated, but once you are through with it, it can ease your work considerably. An investor needs to fill up a conversion request form (CRF) and submit it to the depository participant (DP), along with the latest statement of account from the fund house. Separate applications have to be submitted for each folio. The DP will verify the records and forward the conversion applications to the fund houses.

Consolidated view

The biggest benefit for the investor is that he gets a consolidated view of all his holdings across stocks and mutual funds at one point—his demat account. It makes monitoring various investments a lot easier because you no longer have to check multiple statements of account from different fund houses.

One can check the latest balance and transactions across all mutual funds, along with the valuation of their holdings at current NAV through NSDL's Internet-based facility, IDeAS.

This applies to nominee details as well, which continue to be valid once the mutual fund units are dematerialised. While it is easy for investors who have the same set of nominees for all investments, it may be a problem for those who have separate nominees for different holdings. In such a case, they need to change these details in the demat account.

Additional costs

Before you decide to convert your units, keep in mind that this convenience comes for a cost. Opening a new demat account means additional cost in the form of annual maintenance charges. These can vary from Rs 300-500 a year. You will also need to open a trading account with a brokerage house.

Then there are the transaction charges. Currently, most stock brokers do not charge any brokerage fee for buying mutual funds through them, but you need to confirm this with your broker. The DP also levies a charge. Each time a security moves out of your demat account, you need to pay a fixed charge of Rs 20 per transaction.

DISADVANTAGES Cumbersome procedure to convert units to demat.Additional costs for maintenance and transaction.All schemes are not available with brokers for sale and purchase.If you sell mutual fund units worth Rs 10,000 from five different schemes, you will end up paying Rs 100 as demat transaction charges. All these layers of charges are a needless burden on investors, who could go through their advisers or fund houses to make investments.

Given these costs, opening a demat account purely for transacting mutual funds does not make sense. "Unless you want the benefit of viewing all your holdings in one place, it doesn't add any value."

One major drawback is that all brokers, especially small outfits, don't offer trading in mutual funds. Since all brokers do not offer all mutual fund schemes, you may find that the scheme you choose is not available with your broker.

Why would a person choose a mutual fund over an individual stock?

There are a number of reasons why an individual may choose to buy mutual funds instead of individual stocks. The most common are that mutual funds offer diversification, convenience and lower costs.

Many experts agree that almost all of the advantages of stock portfolio diversification (the benefits derived from buying a number of different stocks of companies operating in dissimilar sectors) are fully realized when a portfolio holds around 20 stocks. At the point that a portfolio holds 20 stocks from 20 companies operating in different industries, almost all of the diversifiable risk associated with investing has been diversified away. The remaining risk is deemed to be systematic risk, or market-wide risk, which cannot be diversified away. Since most brokerage firms having a minimum share purchase requirement, it's hard for many investors to afford 20 different stocks.

The convenience of mutual funds is undeniable and is surely one of the main reasons investors choose them to provide the equity portion of their portfolio, rather than buying individual shares themselves. Determining a portfolio's asset allocation, researching individual stocks to find companies well positioned for growth as well as keeping an eye on the markets is all very time consuming. People devote entire careers to the stock market, and many still end up losing on their investments. Though investing in a mutual fund is certainly no guarantee that your investments will increase in value over time, it's a way to avoid some of the complicated decision-making involved in investing in stocks.

Many mutual funds like a sector fund offer investors the chance to buy into a specific industry, or buy stocks with a specific growth strategy such as aggressive growth fund, or value investing in a value fund. People find that buying a few shares of a mutual fund that meets their basic investment criteria easier than finding out what the companies the fund invests in actually do, and if they are good quality investments. They'd prefer to leave the research and decision-making up to someone else.

1. Don't panic

The market is volatile. Accept that. It will keep fluctuating. Don't panic.

If the prices of your shares have plummeted, there is no reason to want to get rid of them in a hurry. Stay invested if nothing fundamental about your company has changed.

Ditto with your mutual fund. Does the Net Asset Value deep dipping and then rising slightly? Hold on. Don't sell unnecessarily.

2. Don't make huge investments

When the market dips, go ahead and buy some stocks. But don't invest huge amounts. Pick up the shares in stages.

Keep some money aside and zero in on a few companies you believe in.

When the market dips --buy them. When the market dips again, , you can pick up some more. Keep buying the shares periodically.

Everyone knows that they should buy when the market has reached its lowest and sell the shares when the market peaks. But the fact remains, no one can time the market.

It is impossible for an individual to state when the share price has reached rock bottom. Instead, buy shares over a period of time; this way, you will average your costs.

Pick a few stocks and invest in them gradually.

Ditto with a mutual fund. Invest small amounts gradually via a Systematic Investment Plan. Here, you invest a fixed amount every month into your fund and you get units allocated to you.

3. Don't chase performance

A stock does not become a good buy simply because its price has been rising phenomenally. Once investors start selling, the price will drop drastically.

Ditto with a mutual fund. Every fund will show a great return in the current bull run. That does not make it a good fund. Track the performance of the fund over a bull and bear market; only then make your choice.

4. Don't ignore expenses

When you buy and sell shares, you will have to pay a brokerage fee and a Securities Transaction Tax. This could nip into your profits specially if you are selling for small gains (where the price of stock has risen by a few rupees).

With mutual funds, if you have already paid an entry load, then you most probably won't have to pay an exit load. Entry loads and exit loads are fees levied on the Net Asset Value (price of a unit of a fund). Entry load is levied when you buy units and an exit load when you sell them.

If you sell your shares of equity funds within a year of buying, you end up paying a short-term capital gains tax of 10% on your profit. If you sell after a year, you pay no tax (long-term capital gains tax is nil).

What you MUST do

1. Get rid of the junk

Any shares you bought but no longer want to keep? If they are showing a profit, you could consider selling them. Even if they are not going to give you a substantial profit, it is time to dump them and utilise the money elsewhere if you no longer believe in them.

Similarly with a dud fund; sell the units and deploy the money in a more fruitful investment.

2. Diversify

Don't just buy stocks in one sector. Make sure you are invested in stocks of various sectors.

Also, when you look at your total equity investments, don't just look at stocks. Look at equity funds as well.

To balance your equity investments, put a portion of your investments in fixed income instruments like the Public Provident Fund, post office deposits, bonds and National Savings Certificates.

If you have none of these or very little investment in these, consider a balanced fund or a debt fund.

3. Believe in your investment

Don't invest in shares based on a tip, no matter who gives it to you.

Tread cautiously. Invest in stocks you truly believe in. Look at the fundamentals. Analyse the company and ask yourself if you want to be part of it.

Are you happy with the way a particular fund manager manages his fund and the objective of the fund? If yes, consider investing in it.

4. Stick to your strategy

If you decided you only want 60% of all your investments in equity, don't over-exceed that limit because the stock market has been delivering great returns.

Stick to your allocation.