What are the Pros and Cons of investing in Mutual Funds?

Nutan Gupta

20 Dec 2016

Mutual funds are considered to be the most popular investment vehicle. Most of the investors invest in mutual funds in order to diversify their holdings and earn maximum return. While it is true that mutual funds provide diversification, it is also important to determine the pros and cons of mutual funds.

Pros of Investing in Mutual Funds

Professional Portfolio Management

An individual’s portfolio is managed by experienced industry professionals who have expertise in this field. They constantly manage your portfolio in a way which will help you generate maximum return on your investments.

Diversification

Mutual funds can invest in securities across various asset classes like binds, commodities or cash. This helps in portfolio diversification. If one sector is not performing well, there is a high probability of other sectors compensating for the loss.

Affordable

Investing in mutual funds is very affordable as an individual can invest as low as Rs. 500 every month in a mutual fund. There is no upper limit on the amount of money that can be invested. So, even a small investor can participate in the market by investing in mutual funds.

Liquidity

All it takes to exit from a mutual fund is one instruction to your broker/agent to sell it. The funds come back to your account in 48 hours.

Cons of Investing in Mutual Fund

Fees & Expenses

Mutual funds charge annual fees to their clients known as expense ratio irrespective of the fund’s performance. This can be defined as the cost of doing business. Moreover, there is an exit load on mutual fund schemes, if the investor wishes to redeem the investment before a particular period of time.

Lock-in Clause

There are two types of mutual fund schemes - one which allows you to enter and exit any time, which is know as open-ended scheme and the other scheme comes with a lock-in period of 3-5 years, which is a closed-ended scheme. If an investor wishes to redeem the investment before the lock-in period, he needs to pay a certain amount as exit load.

It is always advisable to consult a financial advisor and understand all the clauses before investing in mutual funds.

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Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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What are the Pros and Cons of investing in Mutual Funds?

Nutan Gupta

20 Dec 2016

Mutual funds are considered to be the most popular investment vehicle. Most of the investors invest in mutual funds in order to diversify their holdings and earn maximum return. While it is true that mutual funds provide diversification, it is also important to determine the pros and cons of mutual funds.

Pros of Investing in Mutual Funds

Professional Portfolio Management

An individual’s portfolio is managed by experienced industry professionals who have expertise in this field. They constantly manage your portfolio in a way which will help you generate maximum return on your investments.

Diversification

Mutual funds can invest in securities across various asset classes like binds, commodities or cash. This helps in portfolio diversification. If one sector is not performing well, there is a high probability of other sectors compensating for the loss.

Affordable

Investing in mutual funds is very affordable as an individual can invest as low as Rs. 500 every month in a mutual fund. There is no upper limit on the amount of money that can be invested. So, even a small investor can participate in the market by investing in mutual funds.

Liquidity

All it takes to exit from a mutual fund is one instruction to your broker/agent to sell it. The funds come back to your account in 48 hours.

Cons of Investing in Mutual Fund

Fees & Expenses

Mutual funds charge annual fees to their clients known as expense ratio irrespective of the fund’s performance. This can be defined as the cost of doing business. Moreover, there is an exit load on mutual fund schemes, if the investor wishes to redeem the investment before a particular period of time.

Lock-in Clause

There are two types of mutual fund schemes - one which allows you to enter and exit any time, which is know as open-ended scheme and the other scheme comes with a lock-in period of 3-5 years, which is a closed-ended scheme. If an investor wishes to redeem the investment before the lock-in period, he needs to pay a certain amount as exit load.

It is always advisable to consult a financial advisor and understand all the clauses before investing in mutual funds.

Have Referral Code?