Every investment has its pros and cons, so mutual funds also. One must keep in mind about the Pros and Cons of Investments in mutual funds.
Advantages of Mutual Funds for Investors
1. Simplicity
Mutual fund concept is simple and easy to understand for a common man. Investments in the mutual funds are considered to be easy, compare to other available instruments in the market, and the minimum investment is small.
2. Flexibility
Mutual funds offers flexibility. i.e. you can start and stop the investment at any time. There is no commitment to the investment.
3. Professional Management
Mutual funds offer investors the opportunity to earn an income or build their wealth through professional management, by well qualified professional. There are several aspects of such professional management. Investing in line with the Investment Objective. Investing based on adequate research and ensuring prudent investment processes are followed.
4. Affordable Portfolio Diversification
Don’t Put All Your Eggs in One Basket. Units of a scheme give investors exposure to a range of securities held in the investment portfolio of the scheme. Thus, even a small investment of Rs. 5,000 in a mutual fund scheme can give investors a diversified investment portfolio. With diversification, an investor ensures that all the eggs are not in the same basket. Consequently, the investor is less likely to lose money on all the investments at the same time. Thus, diversification helps reduce the risk in investment. In order to achieve the same diversification as a mutual fund scheme, investors will need to set apart several lakh of rupees. Instead, they can achieve the diversification through an investment of a few thousand rupees in a mutual fund scheme.
5. Economies of Scale
Large investment corpus leads to various other economies of scale. For instance, costs related to investment research and office space get spread across investors. Further, the higher transaction volume makes it possible to negotiate better terms with brokers, bankers and other service providers.
6. Liquidity
Just like an individual stock, the mutual fund also allows investors to liquidate their holdings as and when they want.
7. Tax Benefits
Specific schemes of mutual funds ELSS (Equity Linked Savings Schemes) give investors the benefit of deduction of the amount invested, from their income that is liable to tax. This reduces their taxable income, and therefore the tax liability. Further, the dividend that the investor receives from the scheme, is tax-free in his hands.
8. Convenient Options
The options offered under a scheme allow investors to structure their investments in line with their liquidity preference and tax position.
9. Investment Comfort
Once an investment is made with a mutual fund, they make it convenient for the investor to make further purchases with very little documentation. This simplifies subsequent investment activity.
10. Regulatory Comfort
The regulator, Securities & Exchange Board of India (SEBI) has mandated strict checks and balances in the structure of mutual funds and their activities.
11. A systematic approach to investments
Mutual funds also offer facilities that help investor invest amounts regularly through a Systematic Investment Plan (SIP), or withdraw amounts regularly through a Systematic Withdrawal Plan (SWP), or move money between different kinds of schemes through a Systematic Transfer Plan (STP). Such systematic approaches promote an investment discipline, which is useful in long term wealth creation and protection.
Disadvantages of a Mutual Fund
1. Professional Management
Some funds doesn’t perform in neither the market, as their management is not dynamic enough to explore the available opportunity in the market.
2. Choice Overload
Nowadays there are so many schemes with so many options make investors confused about the choice of the funds – and multiple options within those schemes – make it difficult for investors to choose between them.
Recent Comments