Whether you are a seasoned or first-time investor, mutual fund is something you should seriously consider adding to your investment portfolio. However, you should be aware of the advantages as well as possible pitfalls of this investment tool.
Listed below are the advantages and disadvantages of mutual funds to help you make an informed decision.
Advantages of Mutual Funds
Let us first look at the advantages of mutual funds:
To diversify is to reduce risk. The advantage of mutual funds is that diversification is automatically done. Instead of buying shares, bonds, and other investments on your own, you outsource the task to an expert.
2.Professional Money Management
Mutual fund is favored because it doesn’t require the investors to do the research and fund allocation. An asset manager who are considered experts in investing takes care of it all and makes decisions on what to do with your investment. He decides whether to invest in equities or debts or to hold them and for how long.
Liquidity basically refers to the ability to convert your assets to cash.Unless you opt for close-ended mutual funds, it is relatively easier to buy and exit a scheme. You can sell your units at any point,all you have to do is instruct your broker or financial advisor.
In mutual funds, the research and data collection is done by the funds themselves. All you have to do is analyze the performance.Mutual fund dealers allow you to compare the funds based on different metrics, such as level of risk, return, and price. And because the information is easily accessible,the investor will be able to make wise decisions.Choosing a mutual fund is ideal for people who don’t have the time to micromanage their portfolios.
Since Mutual Funds are so diversified in their selection of securities, investors involved in mutual funds are not solely investing in one stock, this reduces the risks for the investors moreover all mutual fund companies come under the purview of SEBI and they need to make necessary disclosures.
6.Ease of Comparison
Mutual funds are also convenient because they are easy to compare. This is because many mutual fund dealers allow the investor to compare the funds based on metrics such as level of risk, return and price.
7.Invest in smaller denominations
By investing in smaller denominations (SIP), you get exposure to the entire stock (or any other asset class). This reduces the average transactional expenses – you benefit from the market lows and highs. Regular (monthly) investments as opposed to lumpsum investments give you the benefit of rupee-cost averaging.
Disadvantages of Mutual Funds
The salary of the market analysts and fund manager basically comes from the investors. Total fund management charge is one of the main parameters to consider when choosing a mutual fund. Greater management fees do not guarantee better fund performance.
2. No intraday-trading on mutual funds
If you want to make a trade on your mutual fund, you’ll likely not know what the “NAV” price will be when you lock in the trade. That is because the NAV (Net Asset Value) is settled at the end of each trading day
There are two different mutual fund structures – one allows you to go in and out at any time and other mutual funds have long-term lock-in periods, ranging from 5 to 8 years. Exiting such funds before maturity can be an expensive affair. A certain portion of the fund is always kept in cash to pay out an investor who wants to exit the fund. This portion in cash cannot earn interest for investors.
4.No Control Over Portfolio
If you invest in a fund, you give up all control of your portfolio to the mutual fund money managers who run it.
5. Index Does Better
In some cases, the stock index may outperform the mutual fund. However, this is not always the case as it depends in large part on the mutual fund the investor has invested in, as well as the skill set of the fund manager.
As you have just read above, the benefits and potential of mutual funds can certainly override the disadvantages, if you make informed choices. However, investors may not have the time, knowledge or patience to research and analyze different mutual funds.