Why fintech apps ask you to open a demat account

Experts say direct MF plans do not generate enough revenue for the fintech apps and so they cross-sell other financial products. (iStockphoto)
Experts say direct MF plans do not generate enough revenue for the fintech apps and so they cross-sell other financial products. (iStockphoto)


Direct mutual fund apps require users to open a demat account, leading to concerns of cross-selling other financial products to generate revenue.

Babu Lal is the go-to finance guy for his family, friends and acquaintances. So when his cousins decided to start investing in December 2022, they sought Lal’s help. Lal, a 32-year-old fintech consultant based in Churu, Rajasthan, recommended that they start with direct mutual fund (MF) plans, without going through distributors and save on commissions. The next step was to help them open a mutual fund investing account. But that proved to be cumbersome.

At first, Lal tried to open an account with, INDmoney, an app that facilitates people’s journey in investing. Lal was flummoxed when INDmoney asked him to open both a demat account and a SBM Bank account. A demat account is mandatory for trading in stocks. It is not so for MFs. You can invest in mutual funds directly through an asset management company (AMC) or a registered MF distributor (MFD).

INDmoney’s accounts enabled domestic and foreign stocks investing features but Lal wanted to invest only in MFs. He then tried Groww, another online financial services platform. But that app also wanted him to mandatorily check out the ‘NSE equity’ and ‘BSE equity’ segments. Groww declined to comment on this. INDmoney did not respond to Mint’s queries.

Experts say direct mutual fund plans do not generate enough revenue for the fintech apps and so they cross-sell other financial products. That is the reason, they say, such apps have made it a requirement for new investors to register in other segments as well.


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MF apps and demat accounts

Direct MF apps allow users to transact in MFs by integrating their system with a transaction platform. For instance, they can integrate with registrar and transfer agents (RTAs) such as CAMS or Karvy. Alternatively, they can choose to integrate with exchange-run platforms like BSE Star MF or NSE MF.

Investors can buy mutual funds directly from these exchange-run platforms but these are not user-friendly. And this is where fintech apps come into the picture. They enable users to transact seamlessly with their user-friendly interface. But to have this mechanism running, apps are required to have either an RIA (registered investment adviser) or a broker license.

Most of these apps initially start by using the RIA license or code but eventually shift to using the broker code. This, because the RIA code has a huge compliance burden. The code requires apps to charge advisory fees from clients that apps didn’t want to do. Also, users would have to adhere to additional KYC (know your customer) norms to enable other services like stocks, futures and options (F&O), margin lending, etc.

The easy way out was to shift to a broker code and start offering add-on services to earn profits. In the broker code, a demat account is needed to invest in MFs. Once a demat account is opened, it becomes easier for the apps to cross-sell revenue-earning products like equities, F&O, etc. Experts says this is what apps like Groww, Paytm Money, and INDmoney do.

Varun Sridhar, chief executive officer of Paytm Money, told Mint that users need to open a demat account which is required to make a unique client code (UCC) for transacting in the BSE star platform. They do not, however, store the mutual fund units in demat format, and hence the demat lies dormant without incurring any costs. They only charge a small fee only when users start using equity or F&O segments.

Dev Ashish, an RIA and founder of Stable Investor, said many apps/platforms may undergo structural changes to meet regulatory or business needs every now and then. He said an investor needs to understand that these platforms may resort to cross-selling other products to increase revenues and thus ensure their business viability. But eventually, the onus of protecting themselves from falling prey to unnecessary product sales pitches lies with investors themselves.

“Do not buy or invest in something just because it is being made available to you via anyone. One should be very clear about which products are suitable and what requirements such products serve in one’s overall portfolio," said Ashish.

To be sure, there was no visibility until recently on how these direct MF apps could not earn revenue. In June 2023, Sebi came out with a workaround and said apps can either partner with AMCs for a commission from them or register with the Association of Mutual Funds in India (Amfi) and charge a fixed fee from the investor. Apps that offer direct plans are called ‘execution-only platforms’.

How do apps cross-sell?

Arjit Seth, a chartered accountant based in Gurugram, Haryana, opened an investing account with Groww in 2021 . It didn’t take too long for the 28-year-old to transition to trading stocks, thanks to the promotional videos and emails that Groww threw his way.

Experts said some investors even start dabbling in F&O segment after watching explainer videos put out by the platform. “I used to watch educational videos they posted on technical analysis and how to read charts. It was quite enticing," said a user who did not want to be named.

Industry insiders say offering direct mutual funds is a way for companies to get people hooked on their platform or apps but that wasn’t how they planned to make money.

While apps like Groww, INDmoney, and Paytm try to cross-sell other products, Coin by Zerodha requires users to have a ready demat account to enable the MF investing feature. That way, customers pay a fixed account maintenance charge. Groww, INDmoney, and Paytm Money do not charge anything for maintaining an MF account.

What is the solution?

Ravi Saraogi, an RIA and founder of Samasthiti, said that investors can instead opt to invest directly using the online facility that the AMC provides. He said it would work fine unless one has too many mutual funds that require different accounts. The other option is to use online portals such as myCAMS by CAMS or KFintech by Karvy. These two options allow users to invest in MFs without opening a demat account and also reduce the scope of the apps to nudge naive investors into other segments. People can also invest through the Mutual Fund Utilities (MFU) platform which is operated by AMCs under AMFI. “It’s crucial to platform-proof your MF investments," said Saraogi.

Meanwhile, Lal of Churu, has opened accounts with both Groww and INDmoney. He told Mint that he did so because the interface of both apps were sleek and user-friendly.

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