Advantages and Disadvantages of Mutual Funds

What are mutual funds?

Mutual funds pool shareholder money in order to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are managed by qualified money managers who distribute the assets in an effort to bring in profits or income for the fund’s investors. The portfolio of a mutual fund is set up and kept up-to-date in accordance with the stated investment goals in the prospectus.

Through mutual funds, small or individual investors have access to professionally managed portfolios of stocks, bonds, and other securities. As a result, each shareholder shares proportionately in the fund’s profits or losses. online mutual fund investment in a huge variety of securities, and performance is typically gauged by changes in the fund’s total market capitalization, which are derived from the combined performance of its underlying investments.

Regardless of your level of investment experience, you should seriously consider a mutual fund when assembling your investment portfolio. You should be knowledgeable about both the advantages and any possible disadvantages of this investment.

Below is a list of mutual fund advantages and disadvantages to help you make a decision.

Advantages of Mutual Funds

Purchasing and selling a mutual fund scheme is typically easier, unless you choose closed-ended mutual funds. During a bull market, you can profit by selling your open-ended equity mutual fund shares. Keep an eye on the mutual fund’s expense ratio and exit load.

Equity mutual funds carry some risk because their performance is dependent on changes in the stock market. The fund manager spreads your investment across stocks of businesses in various industries and sectors, thereby diversifying your investment. In this way, when one asset class underperforms, the other sectors can make up for it and protect investors from suffering losses.

Expert Management
Mutual funds are a better option for investors who lack the knowledge or time to carry out the required research and asset allocation. Everything is handled by a fund manager, who also chooses how to invest your money.

The fund manager and the research team select the appropriate securities, such as equity, debt, or a combination of the two, depending on the investment objectives of the fund. The fund manager also decides how long the securities will be held.

The track record and reputation of your fund manager should be taken into account when choosing a mutual fund.

Less Cost for bulk transactions
You must have noticed that as volume rises, prices fall. For instance, if a 100g tube of toothpaste costs Rs 10, a 500g pack might be offered for, say, Rs 40.

The same logic also holds true for shares of mutual funds. The cost of processing and other commissions will be less if you buy multiple mutual fund units at once than if you buy one.

Make smaller-scale investments.
Making smaller investments in mutual funds, starting as low as Rs 500 per SIP installment, will allow you to spread out your mutual fund investments over time. You lower the average cost of investment by spreading your investment across stock market lows and highs. The benefit of regular (monthly or quarterly) investments over lump-sum investments is rupee cost averaging.

Suits your financial goals
There are many different types of mutual funds available in India to meet the needs of investors from all walks of life. No matter how much money you earn, you must make it a habit to set aside some of it for investments, no matter how little. It is simple to find a mutual fund that fits your income, time horizon, investment goals, and risk tolerance.

Cost efficiency
You can compare the expense ratios of different mutual funds, and you should pick the one with the lowest ratio. Your mutual fund’s expense ratio represents the management fee.

Quick and hassle-free process
You can start with one mutual fund and gradually diversify your holdings as you build your portfolio. It is easier to choose from a list of carefully chosen funds that fit your investment objectives and risk tolerance.

It will be easy to keep track of mutual funds. The fund manager, working with his team, will decide when, where, and how to invest in securities in accordance with the investment objectives. In essence, they must consistently outperform the benchmark index and offer investors the best returns.

Tax efficiency
You can invest in tax-saving mutual funds known as ELSS that are eligible for a tax deduction of up to Rs 1.5 lakh per year under Section 80C of the Income Tax Act, 1961. When compared to other tax-saving investments in recent years, long-term capital gains (LTCG), which are taxed at 10% once they exceed Rs 1 lakh, have consistently outperformed.

Automated payments
For a variety of reasons, SIPs and investments are frequently postponed or delayed. You can choose paperless automation with your fund house or agent by sending a SIP mandate, which instructs your bank account to automatically deduct SIP amounts when they are due. Thanks to prompt email and SMS notifications, you can be sure that your mutual fund investments will go according to plan.

The general perception is that mutual funds are less secure than bank products. This is a myth because statutory government organizations like SEBI and AMFI have complete authority over fund houses. The credentials of the fund house and the asset manager can be easily verified through SEBI. They also have a platform for unbiased dispute resolution that serves investors’ interests.

Disadvantages of Mutual Funds

Cost of managing the mutual fund
Investors also cover the salaries of the fund manager and market analysts in addition to the fund’s operating costs. Total fund management fees should be one of your first considerations when choosing a mutual fund. Higher management fees are not always a result of better fund performance.

Exit load
AMCs charge exit loads as fees for withdrawals from mutual funds. It prevents investors from liquidating their holdings for a while. Similar to the lock-in period used by fund companies to maintain the stability of their funds, this operates similarly. Additionally, it helps the fund manager secure the capital required for the accurate and timely purchase of the appropriate securities.

While averaging your loss risks, diversification can dilute your profits. Therefore, you shouldn’t purchase a large number of mutual funds at once.

The benefits of mutual funds can unquestionably outweigh the disadvantages if you make wise decisions, as you have just read.

However, investors might not have the time, patience, or knowledge to research and evaluate various mutual funds.

CA Mukesh Gupta
CA Mukesh Gupta
Mukesh Gupta is the founder and director of Wealthcare. He is Fellow chartered accountant, Certified Financial Planner and Certified Public Financial advisor. He is in financial services industry since 1994. He conducts free money management sessions for corporates and associations on topics related to Personal finance. His previous engagement was with Birla Sunlife group. He regularly writes on topics related to Personal finance and occasionally appear on electronic media.

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