Advantages and Disadvantages of investing in Mutual Funds

Pros And Cons Of Investing In Mutual Funds

Asset management companies (AMC) launch all sorts of mutual funds suitable for different types of investors. A mutual fund launched by AMC is managed by a highly trained, experienced and professional management team. The biggest Fund Houses include ICICI Mutual Fund, HDFC Mutual Fund, Reliance Mutual Fund, Aditya Birla Mutual Fund and SBI Mutual Fund.

Often, it can turn out to be a fairly hectic task identifying the right investment for yourself. In such a situation, mutual funds come handy. But even then, there are some factors you should be aware of before you jump in – such as the total expense ratio (TER), exit loads, fund manager’s efficiency, past performance, and more. Let’s take a closer look at the pros and cons of investing in a mutual fund, to help you to gain some important perspective about mutual funds before you begin your journey.

Pros Of Investing In Mutual Funds

Convenience: Mutual funds are a very convenient mode of investing as professional fund managers do all the research for investors. It saves investors a lot of time, and can be beneficial for an individual who has no time to spare for research work.

Ease of access: You can invest in mutual funds through any local broker, at the AMC’s office or through any online investment advisor pros and cons of investing in mutual fund. They will provide you with the best services and suggestions according to your needs.

Liquidity: Mutual funds are highly liquid. Liquidity refers to the ease of getting in and out of the investment. Selling a mutual fund is quick and easy, since you can do it within just a few steps. A mutual fund’s Net Asset Value (NAV) is calculated only after the market is closed. So, whenever you buy or sell a mutual fund, the units sold or bought will be calculated as per the NAV of that particular day.

Diversification: The fund managers of mutual funds invest your money in multiple asset classes and sectors. The range of sectors in which they invest is fairly large. It varies from different bonds to various security sectors. This helps limit your risk exposure and protects your funds.

Variety: Mutual funds are not limited to a single type. They have plenty of variants – such as Liquid Funds, Ultra Short-Term Funds, Hybrid funds, Dynamic Bond Funds, Equity Funds and many more. You can choose from different funds as per your requirements. All these types of funds are available in Reliance Mutual Fund house.

Systematic Investment Plans(SIPs): SIPs are the ideal investment technique for more than just a beginner investor. If you want to stay invested for the long-term and for retirement planning, consider a SIP. It offers advantages leveraged from the power of compound interest, rupee cost averaging and also inclulates an investment discipline.

Cons Of Investing In Mutual Funds

Fees: When you buy mutual fund units, you have to pay charges for the operation of the mutual fund scheme. This includes investment management and advisory fees, marketing and selling expenses, sales/agent commissions, registrar and transfer agent fees, ongoing service fees, legal and audit fees and fund administration expenses. All these expenses can be calculated using Total Expense Ratio (TER). These expenses are charged annually and should be as low as possible. Low TER saves you a lot of money in a long-term horizon.

NAV calculation: You cannot take advantage of the fluctuation in the prices of a mutual fund; unlike the stock prices, the NAV of mutual funds is calculated only after the market closes.

Exit Load: While most of the mutual funds don’t have a locked-in clause of 1 year, you will be charged if you want to withdraw your investments before 1 year of investment, which is called an exit load. Some close-ended schemes also have a lock-in period of 3-5 years.

Tax ineffective: Mutual funds attracts taxes on capital gains payouts due to turnover, redemptions, gains and losses in stock holdings.

Slow execution time: When you order to buy a mutual fund, your mutual fund units will not be distributed to you immediately. This takes time and you will receive the NAV on the day your order is executed. This may not be a very lucrative idea of investment for those who want faster execution for day trading or want to time the market.

Wrapping Up

  • Mutual funds have some cons, but remain one of the best form of investments and tend to show consistently good performance over the long term.
  • Investing in mutual funds is very effective for retirement planning.
  • Mutual funds have a plenty of variety, suited for investors with different needs.

Article written by admin

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