Comparison of SOA and Demat: Understanding the two methods

Investors have two distinct options for holding mutual fund units: either through a Statement of Account (SOA) with an asset management company (AMC) or in a demat account with depositories like Central Depository Services Ltd (CDSL) or National Securities Depositories Ltd (NSDL). The SOA represents the units that are usually held using  traditional paper-based method, or  through other digital channels and platforms such as  platforms offered by Qualified Registrar and Transfer Agent (RTA) and Mutual Fund Central (MFC) and are often referred to as the physical format, whereas the demat account provides an electronic format for holding mutual fund units.

Let’s look at these two different options of holdings in detail:

1. Demat Mode:

Understanding Dematerialization:
In the context of mutual funds, dematerialization refers to the process of converting mutual fund units from physical form to electronic or digital form. When units are held in demat form, transactions like buying, selling, or switching funds are seamlessly reflected in the investor's demat account, eliminating the need for physical statements or paperwork. This offers greater convenience, as it consolidates all financial assets, including mutual funds, in a single demat account, making it easier for investors to manage and track their portfolio.

Key Aspects of Dematerialization in Mutual Funds:

1. Conversion to Electronic Form:
   • Traditionally, mutual fund units were issued as account statements (commonly called Statement of Account or SOA) in physical form.
   • Dematerialization allows these units to be stored in an electronic format within the investor’s demat account, which is maintained at depository institutions like NSDL (National Securities Depository Limited) or CDSL (Central Depository Services Limited).
2. Reduction in Paperwork:
   • Holding mutual fund units in a demat account eliminates the need for physical documentation or paperwork. Investors no longer need to maintain and safeguard physical certificates or account statements.
   • Redemptions and switches between mutual funds are executed electronically, reducing manual processing errors.
3. Efficiency in Transfers:
   • Dematerialized units allow for easier transfer of mutual fund holdings between accounts in the case of inheritance or gifting.
4. Regulatory Aspect: 
   • Although not mandatory for retail mutual fund investors in India, SEBI (Securities and Exchange Board of India) has made the demat option available to promote digital transactions and efficiency in the financial markets. All systematic investment plans (SIPs) and lump sum investments can be held in either physical form or demat form based on the investor’s preference.

Key aspects of Statement of Account (SOA) mode:

1. Storage and Ownership record of Units:
In the case of SOA, mutual fund units are recorded directly with the mutual fund house (Asset Management Company - (AMC)) and stored in an account based on the investor’s folio number. Ownership of units is confirmed via the statement of account, which is provided by the AMC. There is no demat account involved in this case, and units are reflected in the Statement of Accounts provided by the AMC and in the Consolidated Account Statement(CAS) sent by depositories on a monthly basis.Platforms such as MFC also provide a consolidated view of the holdings across RTAs.

2. Transaction Management:
Transactions are carried out through the AMC, either online via their website or mobile app, or through a distributor/agent. The AMC’s RTA maintains the record of each transaction. The investor receives an updated Statement of Account (SOA) for each transaction with the details of that transaction, and then Consolidated statements are sent on a monthly basis with all the details.

3. Accessibility and Consolidation:
Each mutual fund investment is linked to a different folio number across multiple AMCs. The Statement of Account provided by each AMC only shows the investor’s holdings for that specific mutual fund, and there is no single view across AMCs unless the investor uses a third-party aggregator or Consolidated Account Statement (CAS).

4. Transaction Costs:
There are no additional costs when mutual funds are held in SOA form directly with the AMC. Investors only pay the mutual fund’s expense ratio and any applicable load charges ( exit loads), but there are no charges for holding the units in physical form.

5. Transfer of Units:
Transferring units held in SOA form is more complicated, involving coordination with the AMC, and the transfer may require additional documentation and approvals.

Differences between Demat mode and SOA mode:

Which mode of investment should I choose (Demat vs SOA):

1. Investment Portfolio Consideration:

Choose Demat if:

• You have a diversified investment portfolio (stocks, bonds, ETFs, etc.) and prefer to manage all your financial assets in one place.
• You value the convenience of viewing and managing all your investments (including mutual funds) through a single demat account, allowing easier tracking and portfolio management.

Choose SOA if:

• You don’t need to consolidate other securities (like stocks) in a single account since you only invest in mutual funds and are comfortable with tracking all your holdings at RTA/MFC level or at an AMC level.

2. Transaction Flexibility:

Choose Demat if:

• You prefer the flexibility to buy or sell listed mutual fund units through the stock exchange (Applicable for only listed Mutual Funds (MFs) such as Exchange Traded Units (ETFs)). 

Choose SOA if:

• You are comfortable transacting directly with mutual fund houses (AMCs).
• You prefer a traditional approach to investing in mutual funds, where transactions are managed directly with the fund house, with no need for a broker. 

3. Costs:

Choose Demat if:

• You are willing to pay annual maintenance charges (AMC) for a demat account and other transaction fees that come with holding units in electronic form.
• You already hold a demat account for stocks or other securities, adding mutual funds may not significantly increase costs.

Choose SOA if:

• You want to avoid demat-related charges altogether, as holding mutual funds in SOA form doesn’t involve any fees. 

4. Transfer and Inheritance:

• Choose Demat if:
  • You want a simpler process for transferring your mutual fund units to another person, such as a family member or in case of inheritance. Transfers of demat holdings are straightforward through the depository participant (DP).
• Choose SOA if:
  • Transfers aren’t a primary concern, as moving units held in SOA form requires more manual processing with the AMC and can involve additional documentation.

Ultimately, the decision depends on your investment style, cost considerations for all your investments. For those already using a demat account for stocks, adding mutual funds may be convenient. However, if you're primarily focused on mutual fund investments and want to keep costs low, the SOA option is simpler and sufficient.

Conclusion:
In conclusion, the choice between holding mutual fund units in Demat or SOA form depends on your investment preferences, portfolio management needs, and cost considerations. If you prefer a consolidated view of all your investments, including stocks and ETFs, and want more transactional flexibility, the demat option offers greater convenience, especially for transferring or pledging units. However, if your focus is primarily on mutual funds and you wish to avoid additional demat-related fees, the SOA form provides a simpler and more cost-effective solution. Ultimately, the decision hinges on how you prefer to manage and access your investments.

Disclaimer - Please note that this article or document has been prepared on the basis of internal data/ publicly available information and other sources believed to be reliable. The information contained in this article or document is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party in any manner. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article or document.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Published on Dec 27th 2024.