Mutual Funds Advantages and Disadvantages: Mutual funds are those financial instruments that are beneficial for both the companies as well as the investors. With the help of these mutual funds the companies raise funds for the expansion and business purposes while the investors get the chance to use their surplus funds for earning some extra income. Mutual fund investments are time-bound investments which means they are made for a certain period after which the invested amount is returned to the investor along with the profit share earned by the mutual funds. The profit is termed as mutual fund returns.
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What are Mutual Funds? Advantages and Disadvantages of Mutual Funds
Mutual funds are those financial instruments that provide the investor an opportunity to earn dividends in a very risk-free manner. Mutual funds are comparatively less risky in terms of the market than any other financial investment available in the market. Mutual funds approximately give the returns that are most nearly to the calculated assumptions.
Mutual funds are not a beneficial instrument for the investors but are also equally important for the companies. It is an important tool for the companies to raise the funds for their expansion purposes, for which they do not have to get loans from the financial institutions at a very high rate of interest. Mutual funds enable these companies to raise funds in their capacity against the profit share to the investors in return. The funding companies pick up the top-performing stocks and bonds for the offerings of mutual funds.
- Advantages of Mutual Funds
- Disadvantages of Mutual Funds
- Comparison Table for Advantages and Disadvantages of Mutual Funds
- FAQ’s on Advantages and Disadvantages of Mutual Funds
Types of Mutual Funds
There are several categories of mutual funds operative in India, most of them are listed below-
Equity Funds or Equity Schemes: Equity funds are the most profitable investment tool but on the other hand, these are also at high risk. These types of mutual funds facilitate the investor to trade in the stock market, which makes these funds highly risk-prone though they provide very high returns also.
Debt Funds or Debt Schemes: Debt funds are other types of mutual funds recognized by Indian financial institutions. These are the type of investment instruments that are much more secure if compared to equity funds. These types of investments provide fixed returns but in a secure way. The popular debt schemes for investment purposes are various types of bonds such as government bonds, corporate bonds, etc. The debt funds are also known as hybrid funds.
Hybrid Funds or Hybrid Schemes: These are known as hybrid funds because these funds act as a bridge between equity funds and debt funds, in other words, these types of funds are a perfect balance of risk and return. These types of funds are generally low in the risk capacity while they provide a regular return, monthly returns are most widely preferred in this type of investment.
How to Invest in Mutual Funds?
It has always been a dilemma for investors to find out the perfect and most trustworthy ways of investment. Since there are various types of mutual funds the confusion arises even more. There are mainly two types of investments made in mutual funds: one-time investments and systematic investment plans or SIPs.
One-time investments are more prone to risk but they offer high returns also. In a one-time investment, it is very necessary to track the markets regularly and make the investments at the right time to yield the highest returns. While in systematic investment plans or SIPs investments are not made at one time, instead in this type investments are made at regular intervals so that all of the money is not at risk.
These types of investments are less risky but they do not produce the returns as high as the one-time investment does. It is suggested that beginners should opt for SIPs instead of one-time investments at the early stages.
Advantages of Mutual Funds
- Liquidity: liquidity in financial terms means the cash or any type of assets which can further be transformed into cash in hand. This is the first and very important advantage of mutual funds that recoup the units. This means to say that they are much easier to withdraw when needed, unlike the fixed deposits.
- Diversification: The worth of an investment may not fluctuate simultaneously. It’s quite possible that the value of one investment when increases, and the other decreases. This type of diversification reduces the risk in making a portfolio and for the investors too.
- Expert management: To every newcomer in the world of Mutual Funds, there are many experts present in the industry to help them. Probably, all the investors might not have experience or knowledge about where and how to invest. Hence, the experts come up and help the investors by pooling the money from them and investing it in securities.
- Safety and transparency: Investing in mutual funds are much more transparent than earlier. With the strict guidelines issued by the SEBI, all the mutual fund’s products have been labeled and have color-coding. This will help the investors to find out the risks related to the security and can make wise decisions.
- Lower cost: In mutual funds, the fund collected from the investors is invested in the securities. These assets help to save the money of the owner in transactions and other types of cost reductions as compared to normal transactions.
- Low tax on gains: Under section 80 of Income Tax IT, investors can save up to 1.5 lakh per year with an equity-linked saving scheme.
Disadvantages of Mutual Funds
- High costs: Some of the mutual funds are too much exorbitant. This means that if the investors exit from the funds before the due time, then they may have to suffer the loss of exit charges.
- Diversified funds: However, diversification of funds protects the investors from the losses, still on the other hand they restrict them from availing of the benefits of other high–margined sectors. Which is indeed a big loss.
- Varying Returns: The ups and downs of the stock market affect every big and small section and Mutual Funds are not excluded. When the market fluctuates, then the returns on the mutual funds are not guaranteed and may vary according to the fluctuations.
- Lock-in period: Lock-in period is the one in which the investors cannot redeem, withdraw or make any kind of transactions. Therefore, you cannot use this money in case of urgency or emergency.
Comparison Table for Advantages and Disadvantages of Mutual Funds
| Advantages | Disadvantages |
| Liquidity | High costs |
| Diversification | Diversified funds |
| Expert management | Varying results |
| Safety and transparency | Lock-in Periods |
| Lower costs | |
| Taxes on gains |
FAQ’s on Advantages and Disadvantages of Mutual Funds
Question 1.
what types of Mutual Funds are available in India?
Answer:
- Equity Funds
- Money market funds
- Balanced funds
- Fixed income funds
Question 2.
Are bank accounts and PAN important for investing?
Answer:
Yes, bank accounts and PAN are necessary for investing in any securities.
Question 3.
Can Mutual Funds be easily accessed?
Answer:
Yes, Mutual Funds are easily available through brokerages, agents, and online modes too.
Question 4.
Which body regulates the Mutual Funds?
Answer:
SEBI is the regulatory body under which all the securities and mutual funds are regulated.