The household sector holds a significant position within the Indian economy, contributing substantially to the total gross domestic savings with a notable 70% share. These savings are divided into two main categories: financial assets and physical assets.
Traditionally, Indians have preferred to invest their savings in bank deposits due to their perceived safety and stability, while showing less inclination towards the stock market due to its perceived volatility and complexity.
Also Read: How to update personal details in my demat account?
However, there has been a noticeable shift in this trend, particularly among millennials, who are increasingly participating in stock market investing. This change can be attributed to various factors, including the emergence of mobile trading platforms that offer greater accessibility and ease of trading, as well as the increased availability of financial information for researching listed companies.
Furthermore, regulatory efforts aimed at enhancing awareness about stocks, along with a growing willingness among young Indians to take on some level of investment risk, are contributing to this shift.
As a result of this surge in retail participation, many firms are actively raising funds through the stock market. Investors are either directly purchasing stocks by opening demat accounts or opting for diversification and lower risk through mutual funds.
This shift in investment behaviour is reflected in the increased net inflow into equity mutual funds, which reached 21,780 crore in January, marking the highest monthly inflow in two years. Concurrently, the total number of demat accounts in India is approaching the 11 crore mark, indicating a growing interest in stock market participation among investors.
Amid this changing landscape, a prevalent question emerges: Are investors able to store bonds and mutual funds in their demat accounts? Let’s explore the potential, taking into account the widening scope of retail investment in India.
Also Read: How can one open a demat account? Here are 4 simple steps to follow
What is a demat account?
A dematerialized (demat) account acts as a digital vault for the financial securities purchased by an investor, storing them in electronic format. This account simplifies the storage and management of financial securities, providing convenience and accessibility to investors.
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Having a demat account is essential for anyone wishing to trade in the Indian stock market. These accounts are offered by depository agencies, primarily CDSL and NSDL, both of which are registered with the market regulator, the Securities and Exchange Board of India (SEBI).
Understanding Mutual Funds
A mutual fund is a financial vehicle managed by a professional fund manager, operating as a trust that pools money from multiple investors with shared investment goals. These funds invest in a variety of assets, such as equities, bonds, money market instruments, and other securities.
The income or gains generated from this collective investment are distributed proportionately among the investors after deducting applicable expenses and charges, determined by the scheme’s “net asset value” (NAV). In essence, mutual funds are formed by the contributions of numerous investors.
Mutual funds cater to investors who may lack substantial capital for investment or those who prefer not to conduct market research themselves but still aim to increase their wealth. Professional fund managers invest the pooled money according to the scheme’s objectives, while the fund house charges a modest fee, regulated within certain limits by the Securities and Exchange Board of India (SEBI).
Also Read: Demat Account: What are the tax implications of transactions?
Bonds: A Stable Investment Vehicle
If you prioritise stable income and lower risk in your investment strategy, bonds offer an attractive option. A bond represents an instrument issued by corporations or governments to raise funds for various purposes, including financing their debt or funding social welfare programs.
Bonds can be acquired through an auction system, akin to an IPO in the debt market, or purchased in the secondary market, similar to shares. Bondholders receive stable interest payments periodically until the bond matures, at which point the issuing corporation or government repays the principal amount or face value.
Simplifying Investment Holdings
Investors seek to optimise their investment management by consolidating their holdings of shares, bonds, and mutual funds into a single Demat account. This strategic approach offers investors a comprehensive view of their investment portfolio.
Historically, investors maintained separate accounts for distinct asset classes, requiring one account for stocks and bonds within a Demat account, and another for mutual funds. However, the introduction of demat accounts has revolutionized this conventional approach.
With the integration of various asset classes into a solitary Demat account, investors now have the opportunity to efficiently manage their investments. No longer constrained by multiple accounts, investors can seamlessly oversee their mutual funds, stocks, and bonds on a unified platform. This provides investors with the flexibility and convenience to invest in all three asset classes through a single Demat account.
FAQs
Can mutual fund units held in physical form be converted into dematerialized form?
Yes, mutual fund units held in physical form can be converted into dematerialized form through a process known as dematerialization. This involves submitting a request to the respective mutual fund registrar along with the required documentation to convert the physical units into electronic form.
Is a demat account mandatory for investing in mutual funds?
No, having a demat account is not mandatory for investing in mutual funds. While some mutual fund investments can be made directly through a demat account, most mutual fund transactions, including buying, selling, and holding units, can be done through a designated mutual fund distributor or directly through the fund house’s website.
Can different schemes of mutual funds be invested in a single demat account?
Yes, multiple schemes of mutual funds can be held and managed within a single demat account. This provides investors with the convenience of consolidating their mutual fund investments in one place, allowing for easier tracking and management of their portfolios.
Can systematic investment plans (SIPs) be initiated through a demat account?
Yes, some mutual fund companies offer the option to initiate SIPs directly through a demat account. Investors can set up SIPs for specific mutual fund schemes by providing the necessary instructions through their demat account provider. This offers added convenience for investors who prefer managing their SIPs alongside their other investments held in the demat account.
Is investing in bonds completely risk-free?
Investing in bonds carries risks such as interest rate risk and credit risk, making it not entirely risk-free.
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