If you are holding Mutual Fund Units in the physical form, which are represented by a Statement of Account, you have an option to convert the units into dematerialised form (Most of the funds provide this option) in your demat account with any Depository Participant (DP) of NSDL or CDSL.
Once you mutual funds which are in demat form, you can sell them either through stock broker through the Exchange platform (BSE Star & NSE MFSS) or through the off market mode i.e by selling/redeeming it through your Depository Participant.
For Mutual funds in demat form- Redemption request can be placed through Depository Participants & Exchange platforms like NSE MFSS/ BSE STAR platform which are available for trading of Mutual Fund Units.
In case the Investor desires to redeem units through the mutual fund, the Dematerialised units have to be converted into physical form (represented by statement of account.
Benefits that are seen in holding your MF in demat form- paperless transactions and consolidation of all your mutual funds in a single Demat account and at units can be freely transferred to the accounts of nominees or legal heirs.
MF statement of account is actually a statement that you can demand from the MF anytime and this knocks off the need for a dematerialised form and consolidation of portfolios can be done through any web portfolio tracker like moneycontrol, valueresearchonline etc
However your transaction costs increase due to holding MF in demat form like demat fee, brokerage ,etc . SWP/STP are also not straight forward options when you hold your units in demat form.
In total, there is no concrete benefit of holding MF units in demat form.