Advantages and Disadvantages of Mutual Funds

Are you planning to invest in mutual funds? Good, but you first need to know the advantages and disadvantages of mutual funds. Take a look at them.

Advantages of mutual funds

• Risk mitigation – Investing in stock market is a very risky affair be it a stock, share, bonds, real estate, etc. Mutual funds are a good option to reduce the risk since it diversifies the portfolio by investing in many securities.

• Professional management – Mutual funds in India are regulated by SEBI and other government norms and are professionally managed. A professionally managed fund is a good one to invest in.

• Cost reduction – Transaction cost is considered a huge cost for making investments. Since mutual fund transactions are large, they offer economies of scale in terms of investment as large asset size is purchased with the same transaction cost.

• Liquidity – If you need fast cash, mutual funds can be a good option. Investment in mutual makes it easy to access funds by offering the option to liquefy in less time.

• Service offering – Mutual fund companies have good customer service that can help customers resolve their queries with respect to opening an account, fund transfer, checking the balance status, tracking the investment, complete or partial withdrawal of investment amount, etc.

Disadvantages of mutual funds

• Risk – As the saying goes “Mutual fund investments are subject to market risk. Please read the offer document carefully before investing”. The investment in mutual funds is risky since the investment is mainly in stocks, shares and bonds, whose value fluctuate with the market.

• Over-diversification – Diversification is one of the key elements in successful investment. However, diversification turns out to be a bane if overdone. That means, investors at times might acquire or invest in many funds that are highly related and might finally not get the benefit of too much diversification. Since, all the funds being similar the investor might incur losses and thereby the portfolio is a loss altogether.

• Cost – Transactions involved in mutual fund investment incur to cost. The range of fees charged depends on the mutual fund invested. The fees charged for mutual funds are classified into two types:
  • Shareholder fees – This is charged in the form of load and redemption fees.
  • Annual fund operating fees – Charged as annual percentage ranging from one to three per cent.

• Misleading information – Investors might misled by the incorrect information about the mutual fund. Mutual funds are incorrectly treated as small-income or cap funds and some of them might be classified as growth funds. According to the SEC, the fund has to invest eighty per cent of their assets based on their types. The fund manager can solely decide the remaining amount.