Advantages and Disadvantages of Mutual Funds

1. Introduction::

Although mutual funds allow investors to invest in a diversified bunch of securities and are managed by professional and experienced fund managers they have their own share of 2 sides, as it provides investors with expert services it also charge them an additional cost out of their profits, in this article we discuss such advantages and disadvantages.

2. Advantages of Mutual Fund:

a. Diversification: One of the primary goals of investment must be diversification of risk and Mutual Funds accomplish this goal well. With a single mutual fund, you invest into various assets and many corporations. If one stock or asset goes down, there are others that may compensate for it.

b. Expert Management: Mutual Fund managers are highly qualified and experienced professionals who are constantly researching, analyzing and managing their funds. Mutual fund companies have access to information beyond what you as an individual or a retail investor have.

c. Liquidity: You can sell or buy mutual funds anytime. Mutual funds are good if you want to invest in an easy to liquidate instrument. Investments can be redeemed within 1-3 working days.

d. Convenience: Mutual Fund investments are highly convenient as you can invest through various channels (Demat Account, Online Bank Investment Account, Direct through Mutual Fund houses, Mutual Fund distributors, various online investment platforms, etc.), can invest anytime, can invest in very small amounts (as low as ₹500), can easily track your portfolio (through mobile apps and monthly reports), get professional management without amateur intervention, access of investment in few financial securities such as Govt. securities, which you as an individual or retail investor do not have easy direct access to.

e. Reinvestment of Income: Mutual funds allow investors to reinvest their dividends and interest in additional fund units. This helps in timely investment of your dividends and interest giving a compounding effect.

f. Range of Investment Options and Objectives: You can find a mutual fund that matches almost exactly what you are looking for, from an investment. This could be related to both your risk profile and your investment horizon.

g. Affordability: You can start your Mutual Fund investment with as low as ₹500. With that money, you could own assets of many corporations, which otherwise is not possible with such small amounts.

h. Transparency & Ease of Comparison: You can track your fund performance on daily basis and easily compare your Mutual fund with peers and benchmark to know their performance and accordingly take a call to invest more or to sell the existing one.

3. Disadvantages of Mutual Funds:

a. Exit Loads: Many of the Mutual Funds charge an Exit load, which means a penalty if you redeem your investments before a certain time frame. Exit Load varies across fund schemes and can be as high as 2% of total redemption and can also be 0%.

b. Management Fees/Expense Ratio: As the saying goes, ‘There are no free lunches on Wall Street’, same goes for Mutual Funds. A Mutual Fund charges a fee for managing your money. If a fund earns 10 per cent return and has a 1.5 per cent expense ratio, it would mean an 8.5 per cent return for you as an investor.

c. Subject to Market Risks and No Guaranteed Returns: Even though different kind of Mutual Funds carry different risk profiles, but none of them gives you Guaranteed Returns like Bank FDs, PPF etc. Returns depend on Stock market conditions for Equity based funds and on interest rate fluctuations for debt funds.

d. Too Many Options create confusion: There are more than 40 Mutual Fund companies with more than 2000 primary schemes. It is not an easy task to select the right fund scheme, looking at different types and complexities associated with them. Even after recent rationalization of schemes by SEBI (Based on SEBI circular on 6th Oct 2017 names ‘Categorization and Rationalization of Mutual Fund Schemes’), things have simplified a little bit but not too much. According to various analysis drop in number of schemes has been just 3%.

e.No Control: Investment in Mutual Fund doesn’t give you any control over the choice of securities selected by Fund Manager. You must completely trust his/her judgement.