Demat Account or Asset Management Company: What Should be Your Choice When Buying Funds

The world of investment can be particularly confusing for beginners. It is widely advised to the youngsters and the newly earning members of the society to start saving and investing as soon as possible. One of the most commonly used investment instrument employed by the Indian youth today is Mutual Funds or Systematic Investment Plans. Thousands of young earning members are investing their hard earned money in an investment in the hope of getting attractive returns. This is for a good reason. Mutual funds have proved to be one of the best tools to create wealth for those people who are looking for long term investment options. This makes it a favourable choice for the youngsters as they have time on their hands.

Getting Started with Demat Accounts

When getting started with Mutual Fund investment, it is widely believed that it is best to open a Demat account. Demat accounts are easy to open and convenient to use. One can open a Demat account with any of the top banks in India or opt for a reputable broking company. In addition to this, having a Demat account also means that it becomes easier for the investor to buy other types of financial instruments while using a single account for monitoring and carrying out investment activities.

In a generation where more number of people are technologically skilled, opening a Demat account seems to be a logical option as it allows one to invest in mutual funds over the internet. It is best to know all the other options that are available for mutual fund investments, before committing to a Demat account.

Some of the common questions that have often bothered new investors include questions pertaining to the options he or she has when investing if opening a Demat account is mandatory when investing in Mutual Funds? Is Demat account the best way forward for Mutual Funds investment? Which is the most convenient or cost-effective option and so on?

Facts about Mutual Funds Investment with Demat Account

First and the foremost thing is to know about Mutual Funds investment and Demat accounts is that it is not mandatory for an investor to open a Demat account when investing in Mutual Funds. It is one of the many myths that go around due to a lack of awareness on the part of many.

Another common question is ‘what is the best option.’ There is no right or wrong answer to this particular question. The correct option varies from person to person. The correct option depends on a variety of factors which includes things like the investor’s requirement and his or her understanding of the product that they are dealing in.

One must know that Demat account is compulsory when dealing in equity shares, however, with the advent of latest technologies stock exchanges have started to come up with separate platforms specifically for Mutual Fund investments. Moreover, for the purpose of associated benefits, the DPs have now started offering benefits like transaction in Mutual Funds, apart from providing traditional services and products like bonds, NPS, corporate FDs, and so on.

While there are many advantages of investing in Mutual Funds using a Demat account, there are also certain drawbacks that are associated. There is a widespread belief within the trading community that Demat accounts have the tendency to complicate estate planning. It is beneficial when there is a single legal heir; otherwise, it can be a long drawn out process in case of a demise. Apart from this other demerits of the Demat account includes the additional charges levied, lack of a direct option without a distributor and no advisory provided.

Overall, if an investor is only interested in buying Mutual Funds, and is prepared to pay additional charges and commission without detailed advisory, then Demat account is a good and convenient option. However, if an investor is also interested in investing with a carefully planned approach with professional advisory and calculated costs, then it is better to look for other options.

The Role of Asset Management Companies in Mutual Fund Investment

For those investors who are new in the market, or who do not have much knowledge or interest in it, then it is wise to get a financial expert to manage the money on his or her behalf. This is when utilising the expertise of Mutual Fund Houses, or Asset Management Companies plays an important role.

AMCs collect money from a diverse group of investors and invests it on the investor’s behalf. The investment decisions are based on the investor’s financial goal. Highly qualified fund managers make these critical decisions after careful analysis of a host of different metrics like industry risk, market risk and so on.

When an investor invests with an Asset Management Company, they actually purchase a portfolio from those offered by the company. The process of investment of money involves several steps.

The first step is asset allocation, which is followed by research and analysis. Upon successful completion of a thorough research and analysis process, the investor’s portfolio is constructed primarily based on the expertise and the experience of the manager who is handling the investment. The last step of the process is the performance review. Under this, regular updates are provided to the investor on the sales and repurchases, portfolio details, NAV, etc. This is a set process which makes investment more organised than the other options. At the same time investing with an AMC also means forgoing control over the investment decisions and in effect, over the money of the investor.

This is why when investing in Mutual Funds with an Asset Management Company it becomes very important to choose the company very carefully. A variety of factors must be considered when picking the Asset Management Company. The first thing that an investor must check the value. This is because if an investor is already earning less from a particular fund, then it makes no sense to buy the fund, irrespective of its cost-friendliness.

Besides the values aspect, it is also essential to check for the reputation of the Asset Management Company. One can read reviews, monitor the past performance of the company for consistency, and talk to the existing investors for satisfaction. One should also carefully check for the credential of the fund manager, as it is he or she who would be making all the critical decisions. Hence, a background check is necessary.

Lastly, an investor should also find out if the AMC charges through commission or fee. It is preferable for most investors if they charge a fixed fee instead of a commission.

Looking at it from an objective point of view, AMCs have many pluses, at the same time, it also comes with less control. Moreover, AMCs are often considered as a less stable option as compared to the Demat account service providers like banks and stockbrokers. So it is best not to follow other’s advice and make a choice based on individual requirement and understanding.