Advantages and Disadvantages of Mutual Funds investment

We hear many times in ads that we should invest in Mutual Funds. But on the other hand the same ads show in the end that Mutual Fund investments are subject to market risk. Read all scheme related documents carefully. So, what should we do for that we have to learn advantages and disadvantages of Mutual Funds investment. Let’s wrap it up in the next 5 minutes.

Table of Contents

• What is Mutual Fund.

• Advantages of Mutual Funds.

• Disadvantages of Mutual Funds.

• Whom to Invest in Mutual Funds.

• Conclusion.

A mutual fund is an investment vehicle that pools money from a large number of individual investors to invest in a variety of securities, such as stocks, bonds, money market instruments, and other assets. The mutual fund is managed by a professional fund manager who uses the collected money to buy a diversified portfolio of investments, with the goal of generating returns for the fund’s investors.

When we talk about investment then there are a lot of advantages and disadvantages of Mutual Funds investment. We will study all of them in post ahead.

Advantages :-

1. Diversification :

Mutual Fund investment has a big benefit that it provides diversification because almost each fund invests in minimum 30-50 stocks. Due to this risk of investing in less stocks or one stock reduces. When we talk about safe investing then diversification is very important. Diversification has its own benefits.

2. Liquidity :

By investing in Mutual Funds, an individual can take benefits of liquidity because one can invest anytime when opportunity comes. Also if emergency comes and money is required then it can be redeemed anytime by paying a little exit load. These are very easy to buy and sell which provides flexibility to its investors.

3. Affordability :

The biggest advantage for Mutual Funds we see is that it is affordable for everyone. It often has a low minimum investment which makes it affordable for anyone. In some schemes you can just start with as minimum as Rs.100.

4. Professional Management :

If you are a working personal and can’t study the market and companies then Mutual Funds is the method which provides skills of professional to manage your money by taking some minimal charges. Professional Management reduces the risk of wring pickings.

5. Cost Effective :

By pooling out resources from many investors, mutual funds are able to spread their expenses over a large number of assets, making them a cost effective method for many people. Also some funds like Index funds charge expense ratio less than 0.50%.

Disadvantages :-

1. Complexity :

The biggest disadvantage of Mutual Funds is complexity in choosing the fund and fund house. In the market many funds houses are there which offer 100s of schemes. So, choosing the house and scheme where to invest is very difficult.

2. Lack of Control :

Mutual Funds investment has one more drawback that you don’t have control on buying and selling of stocks. You can choose the fund not the stock in that fund. So, sometimes even if you know better about any stock, you can’t add that in the fund you invested.

3. Market Risk :

We all know that the equity market has some risk involved. It is a high risky asset class as compared to other investment options. The market can remain volatile in the short term which creates the risk for emotional people.

4. No guarantee of profits :

Mutual Funds has one more disadvantage that it doesn’t provide guarantee of profits because market price can go up and down any time. And that is the reason that it is not suitable for the short term.

5. Emotion Management :

Emotion management is the bigger risk as compared to the volatility risk of the market. This is because 80-90% mutual fund investors redeem their money from Mutual Funds in less than 2 years. When market falls rather than doing top-up maximum people redeem money in fear of losing all.

These are the advantages and disadvantages of Mutual Funds investment. On that basis we will learn who can invest in MFs and who can’t.

Whom to invest in Mutual Funds :-

If we talk logically anyone can invest in Mutual Funds. But in a practical way people with low risk profiles should avoid investing in Equity MFs.

Here low risk means who can’t wait for long term say 5-7 years after investing or starting SIP. Because equity funds are beneficial for the one who can stay disciplined after investing. The Mutual Fund investing should be mapped with a particular goal. These are more beneficial for young age because they have more time and capacity to take risks.

Conclusion :-

So, in the last if we come to conclude that if you are a disciplined investor and you want to meet any financial goal in future then it can be a good investment option. SIP is the best route to invest rather than lumpsum if you haven’t knowledge about market.

If you want to learn about SIP then you can read about that by clicking on the link below.

Advantages & Disadvantages of SIP. Where to start best SIP?

This all that shared above is just for education purpose. This is not any kind of investment tip. Consult your financial advisor before investing.

Happy Investing