Mutual funds are unique investment vehicles for both seasoned and first-time investors. While it may be a great option for you, like gold as an investment where you have to stay up to date with today’s gold rate, mutual funds are not without their fair share of potential problems.
Let’s talk about the advantages and disadvantages of mutual funds to help you make an informed decision.
Advantages of investing in mutual funds:
- Diversification at a low cost
Mutual funds can help you take care of a number of short-term and long-term financial goals by investing in stocks and bonds. Mutual funds are also known for providing diversification at minimal costs. This is because when you invest in a mutual fund scheme, your money is pooled with that of other investors, and then invested across multiple industries, sectors and companies. Thus, your risk is distributed over different kinds of securities. Additionally, as an individual investor, it would be hard for you to create a diverse portfolio with a limited amount of investment. With mutual fund schemes, you can build a diverse portfolio with as little as Rs. 500! Moreover, since the management fees are spread across all investors in the scheme, they don’t put much pressure on your wallet
- Professional Fund Management
Mutual fund schemes are managed by professionals who have extensive experience in the field of finance & investing. This makes them better equipped to handle market fluctuations and manage their investments wisely. As an investor, all you need to do is choose the right scheme for yourself and let the experts take care of your investments. Hence unlike gold where you have to track things like gold rate and then make prudent decision with mutual funds an expert does it for you. Click here to learn more.
- Liquidity
Another advantage of investing in equity mutual funds is liquidity. You can easily redeem your investments if you do not want to continue with them or need money urgently. You can sell your units anytime you want by placing a redemption order online or by calling the customer care number provided by your fund house. The proceeds from your redemption request will be transferred to your registered bank account within three business days from the date of placing a redemption request.
Disadvantages of investing in mutual fund:
- Hidden Fees
Mutual funds charge annual fees to manage your money. They are usually deducted from your investment. A part of this fee may be charged when you invest your money in a mutual fund (front load), and the rest may be charged at regular intervals throughout the year (backload). Some funds do not charge any fees at all. Hence, choosing a fund with low fees is important, as it can help you save more money.
- Lack of control
You don’t have direct control over the investments that your mutual fund invests in. Hence, you cannot alter your investments according to changes in the market.
- Reduced returns
When you invest in a mutual fund, you are diversifying your risk across several securities. While it reduces your risk, it also reduces your returns. Mutual funds invest in debt instruments as well as equities to reduce the risk of losing money. As debt instruments are safe, they generate less return compared to equities. This means that you are unable to beat inflation and generate wealth over the long term with mutual funds.
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