Mutual Fund Investments- Advantages and Disadvantages

When it comes to generating savings and making investments, you may choose from a variety of schemes such as mutual funds, fixed deposits, stocks, and bonds, etc. These depend upon various personal factors such as your investment horizon, your investment objective, the amount of money that you are willing to invest, etc. However, among all the investment options available, mutual fund investments are considered ideal for investors of all investment horizons and varied investment objectives.

Additionally, Mutual funds have gained substantial popularity in the past few years, buoyed by their consistent performance, at least partially due to the liquidity-driven rally in equity markets not just in India but also globally. Thus whether you are a novice or an experienced investor, you can start investing in mutual funds today and watch your wealth grow steadily if you are in for the long haul. In fact, as per historical records, equity mutual funds have provided average annual returns of around 15% in the medium to long term.

Advantages of Mutual Fund Investments

Here are the top 7 advantages of investing in mutual funds to help you decide in favour of investing in these schemes-

1. Superior Diversification
   Investing your money in mutual funds helps you immediately gain access to a much wider range of stocks that offer greater diversification as compared to an individual investor’s portfolio. This diversification reduces exposure to a particular sector and thereby reduces the overall volatility of the investor’s portfolio.
2. Professional Management and Oversight
   Mutual funds are professionally managed by fund managers who have years of relevant financial market experience. The fund managers are responsible for managing the portfolios along with a team of subject matter experts who help pick investments and develop strategies that help maximize profits for the scheme’s investors.
3. Flexible Investments
   Mutual funds like SIPs can be started with an amount as low as Rs.500. You can continue to increase the sum invested as and when your earnings increase. However, if you want to capitalize on the performance of the mutual fund in the long term, you may consider making larger investments.
   Additionally, there are multiple other options of investment available that you may consider, depending upon your investment horizon and your investment objective.
4. Tax Benefits
   Multiple mutual fund investments also offer the benefit of tax exemption/ tax deduction. For instance, Investments in Equity Linked Savings Scheme (ELSS) qualify for tax deduction benefits of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. Moreover, if you invest in equity mutual funds, you can get tax-free returns in the form of zero long term capital gains.
5. Higher Liquidity
   Mutual funds are considered one of the most highly liquid investment options. Specifically for the investors who invest in debt funds, since they carry no entry and exit loads and can be redeemed easily. Moreover, a few fund houses also offer benefits such as instant redemption and debit card withdrawal of your mutual fund investment in case of emergencies.
6. Low Transaction Charges
   Unlike other investment options, while investing in mutual funds, the investor gets the same or greater level of diversification without having to pay multiple securities transaction charges. Expenses such as securities transaction charges as well as all fund management charges are represented by the fund’s expense ratio, which is much lower than the cumulative individual securities transaction charges.
7. Transparency of Investments
   Being continuously regulated and monitored by Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI), the asset management companies function strictly according to the regulatory requirements, ensuring that mutual funds are operated in the best interest of the investors. Moreover, as per the current mandate, fund houses are required to publish data about all the funds and distribute the fund information freely for the benefit of various user groups including existing and prospective investors, analysts, etc.

Disadvantages of Mutual Fund Investments

While you should hardly have any second thoughts about investing in mutual funds, there are still a few points that you must be completely aware of, before you start investing in mutual funds. Given below are a few check points-

1. Lock-in period
   Some Mutual fund investments, like ELSS, for example come with a lock-in period of three years, implying that you won’t be able to redeem the sum invested before the specified time period. Whereas in other funds, you are expected to stay invested for a year. If you still choose to exit a fund before its lock-in period gets completed, you will have to pay an amount as Exit Load.
2. Over diversification
   While on one hand, diversification has many benefits, it also has many pitfalls. Diversification averages the risk of loss to an investor, but it can also dilute your profits if done aggressively. The number of securities that you hold is indirectly proportional to the effect of individual returns on your portfolio. Therefore, it is advised that you do not add too many funds (ideally 7 to 9) in your portfolio at one point in time, such that the positive effect of each fund is clearly visible on your portfolio in terms of increased returns
3. Fluctuating returns
   Mutual funds are subject to market risks. The trends in the market can vary from time to time; hence, there are no fixed returns that mutual funds may offer. Moreover, the value of mutual fund investments may also decrease or increase with time. Such changes in the market can be managed by the fund managers who keep a complete track of the changing market trends.
4. Need for research
   If you are not a professional investor and active portfolio management is not your forte, you must take the safer route and make equity investments through a fund house. If you are not an expert in the field, chances are that you will fail to cope with the market fluctuations and hence, make changes in your portfolio accordingly. Therefore, it is advised that you invest in mutual funds only with expertise.