I recently wanted to close one of my Savings Bank Accounts I had with a private bank. When I approached the bank, I was informed that I need to close the linked Demat account before the Savings Account could be closed. And I was also informed that I could not close the Demat account until all the securities (both equity shares and mutual fund units) in the account are sold or transferred to another Demat account. Hence, I transferred all the securities in the Demat account to another Demat account I had with a discount broker. However, it was not possible to transfer units of ELSS funds as they were under a ‘lock-in’. Since ELSS funds provide tax benefits to the investor, they will be under lock-in for three years. The investor cannot sell these mutual funds during this period. The bank executive informed me that the only option to transfer these mutual funds to another one is by re-materializing (converting them into paper form) and getting them dematerialized into another Demat account. This entire process would take 15 days to one month to complete. I need to waste time filling up forms to re-materialize the securities and running around the bank and brokerage offices to complete the process. There was a possibility of this procedure getting extended by a few more days

Instead of going through this complicated procedure, I decided to keep the Bank Account and the linked Demat Account for three years. I need to pay the annual maintenance charges for the Demat account I hold with the bank for three years and maintain the required Average Monthly Balance (AMB) in it till the units of the ELSS funds become free (without any ‘lock-in’ ).

holding mutual funds in demat form

This episode highlights the problems involved in dealing with securities in the Demat form. Investors should understand the complexities involved in holding units in the Demat form. While a Demat account offers benefits to customers in the form of easy safe-keep of securities, it brings in needless hassle in some cases like the one explained above.

Investors should understand the intricacies involved with Demat holding of securities and plan accordingly. Frequent changing of financial service providers like brokers is not advisable as moving securities from one account to the other can be tedious. Due to the availability of multiple options in the market, it is better to select a cheaper option like a discount broker (e.g. Zerodha( or an investment portal (e.g. FundsIndia) and stick with them. When compared with banks, these independent brokers charge lower fee and offer direct mutual funds which are generally not available with the former.

Moreover, having a Demat account with an independent broker (not a bank) will bring additional convenience to investors. As the Demat accounts with independent brokers could be linked to a bank account, there will be no need to close the Demat account whenever you change your banker.