Planning to Invest in Mutual Funds? Check out its Advantages and Disadvantages
Mutual funds offer multiple options to invest across stocks, bonds, government securities, and money market instruments at a relatively low cost. So, an investor should consider investing in mutual funds. But before investing in mutual funds, the investors should know about the merits and demerits of investing in mutual funds.
Advantages of Mutual Funds in India
PAN investor needs time and knowledge to research good stocks/bonds to invest in. Whereas in mutual funds, AMCs appoint a fund manager who has experience and knowledge in identifying and picking good stocks on the investor’s behalf. Also, the fund manager continuously monitors the portfolio and rebalances if required on the investor’s behalf to meet the fund’s objective. The fund manager also decides for how long to hold the securities.
Affordability and convenience
Many investors find it expensive to buy individual securities held by a single mutual fund. So, mutual funds allow investors to start investing with as low as Rs 500.
Mutual funds comes with built in diversification which means that the fund manager invests across various industries and various sectors. This helps to spread the risk and is called diversification. In a way, when one sector/asset class doesn’t perform well then other sectors compensate to avoid loss for investors.
When you purchase something in bulk, the price drop. For example: if 6 bananas cost you Rs 30 then you can get 12 bananas at the cost of say Rs 50.
Similarly, even in mutual funds due to huge economies of scale, there is low expense ratio. Expense ratio represents the annual operating expenses in a mutual fund scheme, and it is expressed as the percentage of fund’s daily net asset value. The expense ratio includes expenses such as administration, management, advertising and more.
Mutual funds are regulated by capital markets regulator and Securities Exchange Board of India under SEBI Regulations, 1966. For investor protection, transparency with appropriate risk mitigation framework and fair valuation principles, SEBI has laid down stringent rules and regulations. All the mutual fund companies are under the radar of SEBI, and they have to make necessary disclosures.
One can invest in Tax saving mutual fund scheme called ELSS which qualifies for tax deduction up to Rs 1.5 lakhs per annum under section 80C of the Income Tax Act, 1961.
An investor can easily purchase and redeem units of open-ended mutual fund schemes on any business day to meet his/her financial needs. However, units of ELSS scheme which has a lock-in of 3 years can be liquidated only thereafter.
Suitable for financial goals
No matter which walk of life you are from or what your income is, mutual funds have schemes that match the investor’s risk appetite, investment goals, and time horizon.
Don’t forget to check: All About Debt Mutual Funds
Disadvantages of Mutual Funds
Cost of managing the fund
Mutual funds come with charges that are levied on the investors to pay for the operational cost of the fund, the salary of the fund manager. Total fund management charge is one of the criteria to look at while making an investment in mutual funds. It is not necessary that higher management generates better fund performance.
Exit load is the fees charged by AMCs when exiting a mutual fund. This is levied to discourage investors from redeeming investments for some time. Exit loads are not mandatory however if the mutual fund house wants to then it can charge an exit load. The exit load varies from 1%-5% depending on the mutual fund house.
Diversification averages your risk of loss; it can also dilute your profits. Due to this one should not invest in too many mutual fund schemes at the same time.
If an investor makes informed choices, the advantages of mutual funds can surely outweigh the disadvantages.
Investing through Elevo can help investors to make the right choices and informed investing decision as we handhold you to pick and choose funds that suits your risk appetite, goals, and time horizon.
Don’t forget to check: What are Liquid Funds?