The Pros And Cons Of Mutual Funds: Everything You Need To Know

“Sometimes it’s the smallest decisions that can change your life forever” – Keri Russel

But when the decision is about investing your hard-earned money in mutual funds, it’s natural to feel a little hesitant. True that mutual funds are subject to market risks, but an informed decision can take you a long way.

To clear your doubts and drive away your dilemma, we have outlined some pros and cons of mutual funds. This will provide you with a better understanding of what to expect from this investment option and allow you to make an informed decision.

Pros of mutual funds:

Following are some of the pros of investing in mutual funds.

Managed by experts – Because everyone needs a bit of guidance.

Making timely investment requires a fair amount of expertise. As mutual fund investments are managed by qualified fund managers who conduct thorough research before making investment decisions, investors may reap benefits of investing in mutual funds over a longer time horizon.

Highly liquid – So that you have enough funds at your disposal.

Mutual fund investments are highly liquid financial instruments. An investor can easily buy or sell units of a mutual fund at the Net Asset Value (NAV), subject to exit load. NAV is the price of per unit of a mutual fund.

Diversification – So that you don’t put all your eggs in one basket.

Having a diverse portfolio can be beneficial for an investor. By investing in mutual fund, an investor can diversify into different sectors, industries and asset classes like equity and debt. This may reduce the overall risk and overexposure of the portfolio.

Investing through SIP – Because consistency is the key.

You don’t have to burn a hole in your pocket to invest in mutual funds. It provides you with an option to invest in Systematic Investment Plan (SIP) for as little as Rs. 500 per month. Also, SIPs are highly flexible, offering better cost price average and allowing investors to reap the benefits of compounding over the long term. Nearly everything in life that offers advantages has its downsides as well. Now that we’ve taken you through the pros, let’s have a look at some of the cons of mutual funds that you should be aware of before starting your investment journey.

Cons of mutual funds:

Associated costs - Don’t overlook the related charges.

Mutual fund companies usually charge a fee for offering investment management services to cover their costs and make profits. As this fee is deducted from the investor’s capital, it effectively eats into the investor returns.

Lock-in period – Get familiar with such financial terms.

Certain mutual fund schemes, such as closed-end mutual funds, have a lock-in period. This means that an investor cannot sell their investment before the maturity date. Investors should also note that Equity-Linked Savings Scheme (ELSS) funds, a tax-saving mutual fund option, also has a three-year lock-in.

Portfolio dilution – Anything in excess is harmful.

Although having a diverse investment portfolio is helpful in many ways, investing in several kinds of mutual fund schemes can lead to portfolio dilution. Portfolio dilution leads to lower risks but can also impact returns. Therefore, an investor should be careful about over-diversification and maintain some concentration in their portfolio.
To sum it up, while mutual funds can offer many benefits to the investors, it essential to carefully weigh the advantages and disadvantages of mutual funds before making investment decisions. You should evaluate your financial and investment goals, risk tolerance and investment time horizon to determine whether mutual funds are the right investment option for you.

FAQs:

Why invest in mutual funds?

Mutual fund can be considered as a good investment option as the funds are managed by qualified fund managers. Mutual funds are also flexible, offer liquidity and offer diversification. Equity Linked Savings Schemes (ELSS) can also help in saving tax.

Can you lose money in mutual funds?

Mutual fund investments are subject to market risks. Every mutual fund scheme carries some degree of risk along with it which can lead to losses including loss of capital. Mutual funds have varying risk levels which affect the probability and severity of the losses. A mutual fund’s performance can be affected by several factors such as volatile markets, changes in government policies, interest rates etc. Such factors can lead to losses.

What are the factors you need to consider while choosing the mutual fund scheme?

While choosing a mutual fund scheme, it is important to consider your financial goals and risk appetite. These factors can help you choose the scheme that may help you to achieve your financial objectives. Apart from them, here are the factors that one should consider:
• The fund’s past performance.
• The fund manager and the investing strategy of the fund.
• The costs and fees associated with the investment.
• Asset allocation of the fund.
• Risk level.

What is the strategy for you to enjoy reasonable returns from mutual funds?

An investor should select an investment strategy depending on their financial objectives and risk appetite. For example, some investors may prefer investing in a mutual fund in lumpsum while some might prefer investing through an SIP. Investors should also consider the various factors that might affect their investment strategy and make changes, if needed, to get the long-term performance.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

This document should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.