Demat Account – Meaning, Features & Benefits

Demat Account – Meaning, Features & Benefits

What is a Demat Account?

Demat Account Introduction

Investing and trading in the stock market is gaining a lot of popularity these days. But you just cannot invest or trade in the stock market without the proper means. You need a demat account or dematerialisation account to invest in the stock market. Having this account is the primary requirement to buy and sell shares. In India, there are two depositories who provide the service of demat account: National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL). You can open an account by availing the services provided by these two depositories through intermediaries or depository participants or stock brokers. In this article, you will get to learn about demat account information and its related concepts.

Firstly, let us learn about the demat account meaning.

What is Demat Account?

Demat account or dematerialised account is an account that holds the shares and securities that you own in an electronic form. You can purchase or sell shares through the online demat account. It is just like a bank account which holds your money at one place. In this account, all your shares, mutual funds, government securities, bonds and exchange-traded funds are held at one place.

While understanding the demat account information, you must have come across the term “dematerialisation”, let us now understand its meaning.

Meaning of Dematerialisation

Dematerialisation, is converting the physical share certificates held by investors into electronic form. With dematerialisation, you are no longer required to hold shares or securities in physical form. By dematerialising, you can easily access your demat account from anywhere across the globe.

Let us now read about the facilities offered by this account.

Facilities Offered By a Demat Account

• With the help of the Delivery Instruction Slip (DIS), you can easily transfer your shares to another individual. The transaction is hassle-free because the slip contains all the relevant details.
• The shares held in the demat account can help you in availing the loan facility from the bank. You can keep the shares held in the demat account as collateral security and avail loan against it.
• With this account, you can easily convert your shares and securities held in physical form into electronic form.
• With the availability of online demat account, you can access and transact through this account by using a desktop, laptop or smartphone from anywhere around the world.
• It provides you the facility of availing the corporate benefits associated with the shares held in this account. Benefits or actions like dividend, refunds, interest, stock split, rights issue, bonus shares, etc. are automatically updated in this account.
• When the holder of the account holds a specific quantity of shares and securities in it, he can avail the facility of freezing the demat account. This is done so as to avoid any debit or credit into the account due to any reason or cause.

This was about the facilities offered by a demat account, let us learn about the benefits of opening an online demat account.

Benefits of Opening Online Demat Account to Investors

• It provides the facility to individual investor to trade from anywhere in the world.
• With this account, the individual investor is not required to maintain extensive paperwork of the transactions and visit the broker regularly.
• It is much safer, quicker and also helps in overcoming inefficiencies like delayed settlements and deliveries.
• Since trading can be done from anywhere with this account, it generates more interest and increases the participation of investors in the share market.
• The shares held in this account are widely accepted in the form of collateral security for obtaining a loan.

Let us now read about the benefits this account from the perspective of a company.

Benefits of Demat Account to Company

• With this account, the companies are able to maintain a more transparent trading system that enables them to efficiently transfer shares electronically to the shareholders.
• It eliminates the use of paper which makes the work easier on the administrative front and it is convenient to store data online rather than on paper.
• Because of online demat account, the companies are no longer required to print and distribute the shares to the investors. This helps them cut costs and saves their valuable time.
• Since the shareholders are now using this account, the companies can easily communicate with the shareholders and pass on the necessary information electronically.

Let us now read about the benefits of this account from the perspective of brokers.

Benefits of Demat Account to Brokers

• With the introduction of this account, the brokers are able to provide better services to the customers because now they don't have to worry about the risks related to theft, bad delivery or fraud.
• It has increased the interest and participation of the investors. This has resulted in an increase in earnings and profits of the broker.
• Brokers can be trusted because of the quick and easy transfer of demat shares. It helps in trust building and increasing the confidence of investors.


Demat account provides the investors with an opportunity to trade and invest in the Indian stock market. No one can participate in the stock market without opening this account. Being the primary requirement to invest in the share market, it has many benefits and advantages to a wide number of participants associated with the stock market.

Demat account is the safest, reliable and quickest way to transact in shares and securities. You can open this account without having any shares in the account and also maintain a zero balance in the account. In order to open a demat account, just visit the website of a reputed stock broker like IndiaNivesh and complete the formalities to enjoy the services.


Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.


How to Open Demat Account – Process, Charges & Advantages

How to open a demat account?Having a demat account is one of the pre-requisites of trading in the stock market. Prior to 1997, securities were held in the physical form i.e. in the form of share certificates. On buying shares, investors were given the contract note along with the share certificates and the transfer deed by the broker. Investors would then send the share certificates and transfer form to the company’s registrars. On receiving and successfully verifying the certificates and transfer form, the registrar would include investor’s name in the register of shareholders and issue them fresh share certificates. However, this process often involved issues such as loss or theft of share certificate, difficulty in storing and maintaining share certificate, bad deliveries, signature mismatch, etc. With the introduction of dematerialisation, these securities are now held in the demat account. A demat account not only saves from the above-mentioned hassles but also makes the entire process of trading and investing very quick and easy. It is important to open demat account if you are willing to trade or invest in the stock market. In fact, according to a recent report of Economic Times, approximately 3.76 million demat accounts were opened only in the year 2017-18. If you too are willing to gain from the potential of the stock market, you can do so by opening a demat account online. This article will walk you through the entire process of how to open demat account. But before we understand the demat account opening procedure, let us first understand the meaning of the demat account. What is a demat account? The word demat is an abbreviation of word dematerialisation. A demat account is just like your bank account. In fact, it operates also just like the bank account. Just like you hold cash balance in your bank account, you hold shares and other securities that you own in your demat account. These are held in dematerialised electronic form. These days all the share purchases and sales are done only through a demat account in non-physical form. Now that you know what is a demat account, let us learn the free demat account opening procedure. How to open demat account online? Step 1In order to open demat account, you have to reach a depository participant with whom you wish to open an account. The depository participant is an agent of the depository (i.e. CDSL - Central Depository Services Limited or NSDL - National Securities Depository Limited). The depository participant could be a broker, bank or other financial institution offering the service. You may find the list of depository participants on the official website of the depositories. Even though you open demat account with the depository participant, the custody of your actual shares will be held with the depositories (CDSL or NSDL) which ensures enhanced safety and security of your holding. Step 2Once you have finalised your depository participant, you need to fill up an account opening form with them. Along with the form, you also need to submit the photocopies of your KYC (Know your Client) documents for proof of identity (which includes PAN card, voter's ID, driving license, passport, IT returns, and other government issued ID cards) and proof of address (which includes telephone bill, electricity bill, voter’s ID, bank passbook or bank statement, etc.). In addition to the above-mentioned documents required for a demat account, you will be required to furnish the copies of your passport-sized photographs and your PAN card. Do not forget to keep the original documents for verification purpose. Step 3At this stage, you will be given a copy of the Depository Participant-Investor agreement which specifies the rules, regulations, rights and obligations regarding the agreement. It will also contain the schedule of charges that you are supposed to incur in the future. It is advisable to carefully read the agreement and understand the terms of the agreement before signing it. Step 4In the fourth step, an in-person verification would be carried out by the staff of the depository participant in order to ascertain the truthfulness of the details provided by you in the account opening form. These days, a lot of brokers also encourage in-person verification over the webcam which makes the process much easier. Step 5Once all the documents are verified, the depository participant will open an account and give you the account number or client ID, also known as a beneficial owner identification number (BO ID). This unique number will be used for all future transactions, IPO applications, etc. With the above-mentioned steps, you will be able to easily open demat account online. Once your demat account is operational, all the share purchases will be credited to this account and all the shares sold will be debited from this account. However, you must know that a demat account can only hold shares and securities in custody and therefore you will need a trading account in order to transact i.e. buy and sell shares and securities. Few things to know about the demat account • You can have multiple demat accounts if you wish to. • You can open a demat account with zero balance of shares as it does not require you to maintain any minimum balance. • It is not mandatory to open a depository participant account with your stock broker. You may choose to open an account with any depository participant as per your convenience. • It is advised that you update your bank account details and any change in your postal address to the depository participant as you will be sent refunds, dividends, interest, etc. in your bank account and all the correspondences will be sent to the postal address mentioned in your demat account. Charges for opening demat account Most of the depository participants do not charge an account opening fee for a demat account. However, there are other demat account charges which an investor has to bear. These include annual maintenance fee for maintenance of the account, transaction fees for selling shares from the account on a monthly basis, fee for dematerialisation and rematerialisation of securities, etc. The demat account charges vary from one depository participant to others. Some may charge a flat fee on every transaction while others may charge a fee based on the type of transaction (i.e. buying or selling). You may find the demat account charges of various depository participants on the websites of the depositories. All you have to do is compare and find out the depository participant that best suits your needs. Now that you are aware of the entire process of how to open demat account, you must also be aware of the advantages and features of a demat account. Advantages of opening a demat account • The biggest advantage of opening a demat account is that it saves from the hassles of theft of certificates, loss of certificates in transit, issuing duplicate certificates, etc. Unlike paper certificates, dematerialised shares and securities do not carry any storage risk and cannot be stolen, forged or damaged. • In case of change of address, you are no longer required to intimate and write separately to the registrar for each company whose shares you own. With the demat account, you just have to intimate your depository participant once. • Unlike trading with physical certificates, the demat account does not have a requirement of minimum lot size which encourages even small investors to participate in the equity markets. • It involves minimum paperwork as shares and securities are held in electronic form.• Trading in demat account saves time and involves quick settlement.• It is a secure and easy way of transacting in the stock market. • You can easily keep a track of all your holdings in your demat account. With numerous advantages of a demat account, more and more people are opening their demat account and making their stock trading a seamless experience. You too can open a demat account in a few simple steps with a renowned broker like IndiaNivesh. So, open your demat account now and enjoy a hassle-free trading experience. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

read more


What is IPO – Introduction, Meaning, Pros & Cons

Introduction to IPOsStock market is one of the most lucrative investment avenues in India. People invest in the stock market because it has the potential to generate handsome returns in a small span of time. Investors trade in the stock market either through the primary market or through the secondary market. The primary market involves investing in the stock market by applying to the Initial Public Offering (IPO) of a company while the secondary market involves purchasing and selling shares directly from the stock exchange. This article, will walk you through the details of what is IPO, its concept and everything related to it.Let us begin by understanding IPO meaning.Understanding Initial Public Offering / IPO DefinitionIPO stands for Initial Public Offering. It is the process by which a private company can go public by selling its shares to the public. The company bringing it can be a new company or an old company. With Initial Public Offering, the company gets its shares listed on the stock exchange.Companies float it to raise funds by issuing new shares to the public. However, the existing shareholders can also sell their holding to the public without the issue of fresh capital. Let us now learn about IPO details and understand the process through which the company brings it.Process of IPOThe first thing that a company does before bringing an IPO is to hire a merchant banker to handle the process. An underwriting agreement is entered between the merchant banker and the company to work out the various financial details of the IPO. The merchant banker underwrites the shares of the company by buying all or some part of the shares and sells it to the public. Later, both the parties file registration statement with the Securities and Exchange Board of India (SEBI) along with the underwriting agreement and necessary documents. SEBI then goes through the details of the statement submitted to it and if the information submitted is found correct, it allots a date to the company to announce its Initial Public Offering.The initial listing fee of the company is Rs. 50,000 and depending upon the paid-up share capital of the company the subsequent annual listing fee is determined. The company determines the price band of the shares and the merchant banker offers its shares to the public. Many roadshows and awareness advertisements are done to generate interest among the public to subscribe to the shares of the company.Let us now understand the various reasons why a company floats an IPO.Reasons for floating an IPO● The main purpose of floating it is to raise money. Companies are in constant need of funds to expand, upgrade or repay their loans. Depending upon the requirements, a company floats it to raise funds.● Through an Initial Public Offering, the shares of the company list on the stock exchange. This increases the liquidity of stocks which promotes various employee stock ownership plans. ● By going public, the credibility and brand value of the company increases. The name of the company being flashed on the stock exchanges is a matter of pride for the company.● When the demand in the market is more, the company can issue higher number of stocks. This opens the door for the company for mergers and acquisitions as the stocks can be issued in exchange for the deal.The above-mentioned are the reasons why a company floats an initial public offering, let us know about the various checks you must do before investing in a company’s offerings.Things To Do Before Investing in an IPO● Check Company’s BackgroundSince the company is coming up with its Initial Public Offering, often there won't be any historical data available to check your decision about investing in the company. However, the company floating it does provide a prospectus. You must carefully scrutinise and read all the details provided in it before arriving at any decision about investing in the company. ● Check the UnderwritersThe success of the IPO depends upon the big broker who is endorsing the new issue. If the underwriters are well established then you may look at investing in such offerings. ● Lock-in PeriodBefore applying for an IPO, you must read the contractual obligation of the company’s executives and investors about the lock-in period of their shareholding. Often, the prices of shares drop drastically after the company completes the offerings as the shareholders of the company sell their shares in the open market once the lock-in period ends.The above points will help you in taking the right decision about investing in an IPO. Let us now read about the points that you must be aware of before investing in them.Points to Remember Before Investing in an IPO● When you invest in an IPO, you invest in the business of the company. The long term returns on the shares allotted to you will depend on the fortune and performance of the company.● The stock market is subject to volatility. Investing in Initial Public Offering can reward you with unbelievably high returns but at the same time, they also have the potential to erode the invested capital so be vigilant while investing.● While applying for it, you must be aware of the fact that the company is not liable to public investors to reimburse the capital.Therefore, while investing, you must be aware of the potential risks and rewards. Let us now read about the advantages and disadvantages of an IPO.Advantages of an IPO● The biggest advantage of an IPO is that it fulfills the financial needs of the company. It is an easy option to acquire capital for its growth and fund a massive expansion. With it, the company can invest in infrastructure and acquire new equipment. It also helps in paying off its debts.● With Initial Public Offering, the shares of the companies are available for mergers and acquisitions. Also if the company wants to acquire any other company, the shares of the company can act as a means of payment.● It attracts talented employees because the company can offer them many stock options and hire them at relatively lower wages.● The owners of the company get the reward of their hard work by listing their company on the stock exchange. In the IPO, they can get for themselves a certain percentage of shares in the company and enjoy the prestige of being a listed company.Disadvantages of an IPO● IPO is a long process and it requires a lot of legal compliances. This distracts the company from its core business and can dent the company's profits. Also, companies are required to hire merchant bankers to ease the process of IPO and in return, they charge hefty fees.● In many cases, the business owners are not able to take as many shares for themselves. Many a times they may not be able to sell their shares in the market due to the lock-in period. Therefore, the business owners are sometimes at a loss when they float an IPO.● Securities and Exchange Board of India (SEBI) conducts many checks before a company floats an Initial Public Offering. This process can be time consuming and requires huge disclosures. Besides, the promoters are required to submit details that may be used by competition and can hamper their business. ConclusionThe above mentioned article will help you learn about IPO right from what it means to how to invest in them and what are the risks and benefits associated with investing in them. Investing in newly launched public companies can be extremely rewarding. However, you must also know that it can be risky and at the same time profits are not guaranteed. Having said that, over the years, Initial Public Offerings have offered good returns to investors. You may consider investing in it after researching about the company and its management. Every month a lot of IPOs list on the stock exchange, all you have to do is find the companies with higher potential and invest in them. Remember, an informed investor always performs better than one who is not.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

read more

Are you Investment ready?

*All fields are mandatory

related stories view all

  • Cost Inflation Index - Meaning, Calculation & Benefits

    Inflation is an economic term and referred to the continuous rise in the price of goods and services, thereby reducing the purchasing power of the money. The pinch of inflation is felt by all sections of the economy, be it, the consumers, investors, and the government.  And, even though it increases the cost of living, inflation is a necessary evil and desirable for the growth and development of the economy. For the reason of inflation, it is only fair to pay more for your goods like comb and brush over the years due to an increase in the price. For the same reason, it is unfair to pay capital gains tax on your assets without taking into account the impact of inflation on the value of the asset. Cost Inflation Index(CII) is the index to calculate the increase in the price of assets year-on-year due to the impact of inflation. What is the Cost Inflation Index? Cost Inflation Index or CII is an essential tool for determining the increase in the price of an asset on account of inflation and is useful at the time of calculating the long-term capital gains on the sale of capital assets. It is fixed by the central government and released in its gazetted offices by the Ministry of Finance every year. Capital gains are the profits arising from the sale of assets like real estate, financial investment, jewellery, etc. The cost price of the asset is adjusted taking into account the Cost Inflation Index of the year of purchase and the year in which the asset is sold, and the entire process is known as Indexation. Cost Inflation Index Calculation The cost inflation index calculation is done by the government to match the inflation rate for the year and calculated using the Consumer Price Index (CPI). Cost Inflation Index India for the financial year 2019-20 has been set at 289. Change of the base year for the Cost Inflation Index The cost inflation index base year was changed in the Union Budget 2017 from 1881 to 2001. The base year was changed by the government to enable accurate and faster calculations of the properties purchased before April 1, 1981, as taxpayers started to face problems with valuations of older properties. The base year has an index value of 100, and the index of the following years is compared to the index value in the base year to determine the increase in inflation. With the change in the base year, the capital gains and tax burden has reduced significantly for the taxpayers as it now reflects the inflated price of the asset realistically. The current Cost Inflation Index Chart for each year is as under- How is the Cost Inflation Index (CII) used in calculating capital gains To calculate the capital gains on your assets the purchase price of the asset is indexed by the cost Inflation Index using the formula below- Indexed cost of the asset at the time of acquisition = (CII for the year of sale/ CII for the year of purchase or base year (whichever is later))*actual cost of acquisition If suppose you purchased a flat in December 2010 for Rs 42 lacs and sold in Jan 2019 for Rs 85 lacs. Your capital gain from the sale of the flat is Rs 43 lacs. The CII in the year in which the flat was purchased is 148, and the CII in the year the flat was sold in is 280. The purchase price of the flat after taking into account the Cost Inflation Index is = (280/148)*Rs42 lacs= Rs 79. 46 lacs  This is the indexed cost of acquisition. Your long-term capital gain after taking indexation into account is Rs 85,00,000- Rs 79,45,946 = Rs.5,54,054. Long-term capital gains on the sale of property are taxed at 20% with indexation benefit. So, your tax liability, in this case, would be- 20% of Rs 5, 54, 054= Rs 1,10,810 Without indexation benefit, the capital gains are taxed at 10%. In this case, the capital gains would be- Sale price of the flat - purchase price of the flat = Rs 85,00,000 – Rs42,00,000 = Rs.43,00,000.  The capital gains tax without indexation benefit will be 10% X Rs 43,00,000 = Rs.4,30,000. Thus, indexation helps reduce the long-term capital gains and reduce the overall tax burden for the taxpayer considerably. Indexation benefit can be used for investments in mutual funds, real estate, gold, FMPs, etc. but is not applied for fixed income instruments like FDs, recurring deposits, NSC, etc. Few important tips to remember about the Cost Inflation Index- If you receive an asset as a part of the will, then in such the CCI for the year in which it was transferred will be considered and not the CCI of the purchase of the asset Indexation benefit for the cost of improvement of the asset is the same as the cost of improvement of the asset. Cost of improvement incurred before 1981 to be ignored. CONCLUSION Cost Inflation Index is an important parameter to be considered at the time of selling long-term assets as it is beneficial for the investors. Reach out to our experts at IndiaNivesh for any queries about capital gains arising from the sale of assets for correct guidance.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing. 

    read more
  • Dematerialisation of Shares – Meaning, Process & Benefits

    The online platform has revolutionised the way we live. Whether it is transacting, connecting with a loved one, getting updated about the happenings in the world, everything can be done online. When it comes to investments, the online platform provides ease and convenience. Investment in shares and share trading is a prevalent activity undertaken by many investors. They invest their money in the stock of a company with a view to earn profits when the stock value rises. When shares are purchased, share certificates are issued in physical form containing the details of the investor and the investor. However, these physical share certificates are inconvenient, and so the concept of dematerialisation has been introduced. Do you know what it is? What is dematerialisation? Dematerialisation of shares means converting physical shares and securities into an electronic format. The dematerialised shares and securities are, then, held in a demat account which acts as a storage for such shares. Dematerialised securities can then be freely traded on the stock exchange from the demat account. How does dematerialisation work? For the dematerialisation of securities, you need to open a demat account with a depository participant. A depository is tasked with holding shares and securities in a dematerialised format. As such, the depository appoints agents, called, Depository Participants, who act on behalf of the depository and provide services to investors. There are two licensed depositories in India which are NSDL (National Securities Depository Limited) and CDSL (Central Depository Services (India) Limited). Need for dematerialisation of shares Dematerialisation of securities was needed because it became difficult for depository participants to manage the increasing volume of paperwork in the form of share certificates. Not only were there chances of errors and mishaps on the part of the depository participant, but physical certificates were also becoming difficult to be updated. Converting such certificates into electronic format frees up space and makes it easy for depository participants to track and update their investor's stockholding. Benefits of dematerialisation for investors As an investor, you can get the following benefits from dematerialisation – You don’t have to handle the physical safekeeping of share certificates. Since your investments are converted in electronic format, you can easily store them without the risk of theft, loss or damage You can access your online demat account and manage your investments from anywhere and at anytime The charges associated with the demat account are low. Depository participants change holding charges which are minimal and you don't have to pay any stamp duty on dematerialised securities Since no paperwork is required to be done, the transaction time is considerably reduced Given these benefits, dematerialisation proves advantageous. Nowadays, the practice of holding physical securities has become almost obsolete and buying through a demat account has become the prevailing norm for investors. How to convert physical shares to demat? To convert physical shares to demat, the following steps should be followed – You should open a demat account with a depository participant. A depository participant can be a bank, financial institution or a stockbroker who is registered as a depository participant with the two licensed depositories of India You would then have to avail a Dematerialisation Request Form (DRF) from the depository participant and fill the form Submit the form along with your share certificates. The share certificates should be defaced by writing ‘Surrendered for Dematerialisation’ written across them. The depository participant would, then, forward the dematerialisation request to the company whose share certificates have been surrendered for dematerialisation. The request should also be sent to Registrar and Transfer (R & T) agents along with the company The company and the R & T agents would approve the request for dematerialisation if everything is found in order. The share certificates would also be destroyed. This approval would then be forwarded to the depository participant The depository would confirm the dematerialisation of shares and inform the depository participant of the same Once the approval and confirmation is complete, the shares would be electronically listed in the demat account of the investor Buying securities in a dematerialised form If you are looking to buy stock in a dematerialized form, here the simple steps that you can take for the same – Choose your broker for buying the securities and pay the broker the Fair Market Value of the securities that you want to buy The payment would be forwarded by the broker to the clearing corporation. This would be done on the pay-in day The clearing corporation would, then, credit the securities to the broker’s clearing account on the pay-out day The broker would then inform the depository participant to debit its clearing account and transfer the shares to the credit of your demat account The depository would also send a confirmation to your depository participant for the dematerialisation of shares in your account. The dematerialised shares would then be reflected in your demat account You would have to give ‘Receipt Instructions’ to your depository participant for availing the credit of shares in your demat account. This is needed if you hadn’t already placed a Standing Instruction for your depository participant when you opened your demat account. Similarly, for sale of dematerialised shares, the process is opposite. Trading in stocks in a dematerialised format is simple, quick and convenient. It has also become the practice of the current market. So, if you want to buy or sell securities, open a demat account and start trading in dematerialised securities. Should you have any doubts, get in touch with the team at IndiaNivesh who will look into your requirement and lead you towards a quick resolution.    Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing. 

    read more
  • High Dividend Mutual Funds

    Dividend mutual funds are a type of mutual fund that pays a regular dividend to the unitholders of the mutual fund scheme, thereby creating a regular source of income for them. The investment strategy of the fund manager is to invest in a basket of companies that have a steady flow of income and promise to pay periodic payment to the investors. Some investors prefer a regular source of passive income from their investments. Mutual fund schemes that offer a high dividend are a popular choice for such investors. The frequency of payment of dividends is decided by the fund manager and is usually fixed. Dividends can be paid daily, monthly, quarterly, six-monthly, or yearly, and the frequency of payment is mentioned beforehand. However, there is no guarantee on the rate and amount of the dividend to the investors and the payment of dividend is subject to the performance of the fund. There are 2 types of dividend mutual funds based upon the asset class that they invest in. 1. Dividend Yielding Mutual Fund (Equity) • Mutual fund schemes which invest more than 65% of their corpus in equity shares of companies • Like any other equity scheme, they have the potential for higher returns, but also carry a higher risk • Investors should invest in these schemes with an investment horizon of medium to long term 2. Dividend Yielding Mutual Fund (Debt) • Mutual fund schemes which invest more than 65% of their corpus in debt instruments of government and corporations like treasury bonds, commercial papers, etc. • These funds carry low risk and provide average returns to investors • Interest received from the various instruments is paid as a dividend to the investors• Investors should invest in these schemes with an investment horizon of short to medium term Tax treatment for dividend mutual funds Till now, dividend income received by the investor used to be recorded under the income head of “Income from other sources” and such income was tax-free in the hands of the investor. However, as per the Union Budget 2020, the DDT is now abolished for companies and mutual funds. From April’20 onwards, any dividend received above Rs 5000 will be taxed in the hands of the investor. It will be taxed as per the individual tax slabs for both equity and debt schemes. Only debt investors who fall in the lower slabs of 10% and 20% will pay lesser taxes on dividends. For all the others, the taxation would be higher going forward. Why should investors invest in high dividend mutual funds? Dividend mutual funds offer unique advantages to the investors, especially when the macroeconomic condition of the country is weak; these investments provide the reliability of income to investors. The benefits of dividend mutual funds which should be kept in mind while investing in such funds• Fund managers of dividend mutual funds invest in companies which can pay steady dividends and even if there is a slowdown in the economy, as companies do not want to send any negative signals, they avoid curtailing payment of dividends, thus making them less volatile than other funds.• Overall returns from these funds are less affected as compared to other funds as the dividends provide a hedge against market volatility.• In a low-interest rate regime, investors looking for a higher consistent income can opt for dividend mutual funds. Disadvantages of a dividend mutual fund scheme • Returns generated by dividend mutual fund schemes are lower as compared to growth schemes in case of rising markets• These funds are not suited for aggressive investors looking for higher returns from their investment• Moreover, with the abolition of Dividend Distribution Tax (DDT), investors in the higher tax-bracket will have to pay higher taxes on the dividend income. Role of dividend mutual funds in a portfolio Invest in dividend mutual funds with an investment horizon of 7 to 10 years for optimal returns. Investment in such funds should be a part of your strategic asset allocation and to lower the volatility of the overall portfolio. Aggressive investors can allocate less than 10% of their portfolio in such funds. Conservative investors, on the other hand, can allocate a higher percentage to these funds. Essential things to keep in mind while investing in dividend mutual funds • Conservative investors looking to invest in dividend funds should invest in large-cap funds, preferably of blue-chip companies that pay a higher dividend. Investing in companies with a higher proportion in mid & small-cap companies will increase the risk of the investment, thereby defeating the purpose of investment• Invest in a fund which has been in existence for some time and witnessed a few market cycles• Avoid investing in a fund with a small corpus to minimize risk as few wrong investment calls can significantly hamper returns• The expense ratio plays a vital role in determining the overall returns from a scheme. Choose funds with a lower expense ratio   CONCLUSION Investing in high dividend mutual funds is a good option if you are looking for a regular income through dividends. Consult our experts at IndiaNivesh to help you guide through the allocation of funds in these schemes as per your investment horizon and risk profile.   Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing. 

    read more