Advantages and Disadvantages of Mutual Funds

Mutual funds are professionally managed investment schemes that are usually managed or run by asset management institutions that bring together a group of people and then invest their money in securities, stocks, and bonds. The investors can buy mutual fund units which will basically represent your shareholdings in the particular scheme you chose.  These so-called funds can be redeemed according to the owners need at the fund’s current asset value. The current Net Asset Value NAV keeps fluctuating on the basis of fund’s holding, this, in turn, makes the investor/owner equal participant in gain or loss of fund under any circumstances. These are the basic things you need to know about mutual funds.

Mutual Funds

Advantages of Mutual Funds

Professional management- The funds and every service provided are management by the professionals. They manage and take good care of everything you entrust them to do. A mutual fund for investors is basically an inexpensive way of getting a full-time manager for monitoring and managing the investments.

Liquidity- The mutual funds are easy to liquidate, all you have to do is instruct the broker or the institution that helped you buy the mutual fund to sell it. This is one of the best features of an a mutual fund, the broker or institution can sell it within a few days and the funds will be transferred to the account in a day. This is comparatively faster than individual stocks.

Low-cost entry –This is one of the best advantages of mutual funds is its low cost of entry. It is comparatively cheaper than stocks. A common person can purchase a mutual fund at a very low rate. He/she don’t have to be a millionaire to buy mutual funds. This alone makes mutual funds accessible to all people.

Easy to invest- Today, there are thousands of mutual funds out on the market. The investor can choose from them. He/she can study check in detail and get advice and comment from the institutions and then invest in the one he/she finds suitable.

Tax efficiency- Mutual funds comes with relatively high tax efficiency. This is one of the key attractive features that attract more investors to invest in mutual funds. If you consider the long-term capital gain tax from equity mutual fund it is absolutely zero.

Transparent and safe investment- All the mutual fund schemes in India come under the watch of SEBI and the mutual funds are bound to make necessary disclosures. They have to disclose the important information on the stocks you hold this includes the track records and the performance over the past years.

Invest in what you like- There is a certain type of mutual fund called sector mutual fund that invests the money in some specified industries only. This is one of the most important mutual fund types if the investor knows well about a specified industry and he/she can invest without a detail study or advice from institutions. Some of the few common sector mutual funds are automobile funds, mining funds, petrochemical funds etc.

Simplicity – Investing in a stock market is not that easy. The investor has to study in detail the performance and track record all by themselves and this proves to be time-consuming. However, when it comes to investing in mutual funds, everything you need to know is already prepared as a report by the mutual fund itself and all you need to do is analyze the performance from the reports and decide. One of the most important advantages of such reports is that it helps you compare the funds on the basis of these reports and select a mutual fund wisely.

Diversification – This is one of the greatest advantages of investing in mutual funds. The investor themselves does not have to do a detailed study on the stock or fund before investing, the money we invest id automatically outsourced to an expert who diversifies the fund efficiently in such a way that it is maximum risk-free for the investor.

Disadvantages of Mutual Funds

Fees for management- The services offered by the institutions for purchasing or selling the mutual funds don’t come free. The institutions charge up to 5% for the services provided. However, the fee is not paid from the investors pocket but from the fund itself. Now you might feel this not to be a big deal, but in real case scenario, it would be close to a 10,000 per year.

Messy clause- The mutual funds are divided into two types. The one that allows investors to go in and out like they find suitable. The other one is totally locked and does not allow the user to go in or out within a time period allocated. You can take the money out of this type too, but, you will be charged for taking out the money.

Fund charges- Mutual funds come with a fee which will be charged at the time when you take out the money. This is normally referred to as an operation fee and is charged in percentage.

Dilution–Mutual funds have numerous diversifications and this can cause confusion. While diversification reduces the risk of major losses to an investor it also prevents the investor from making any major gains. The more you try to diversify your mutual fund, the lesser your mutual fund’s gains will be.

Read Also: Advantages and Disadvantages of Systematic Investment Plan (SIP)

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