February 2, 2023

 In today’s era, everyone is conscious about their investment. Everyone wants to make a good wealth by investing in one way or the other and it is the right thing to do. Mutual funds are one of the most popular options in today’s era, but do you know the advantages and disadvantages of mutual funds.

Before investing in any medium, it is very important to know what are the advantages and disadvantages of that investment.

Through this article, first of all we will talk about what are the benefits of Mutual Funds. After that we will talk about the disadvantages of mutual funds. After this article, you will be able to decide for yourself whether you want to invest in mutual funds or not.

Advantages and Disadvantages of Mutual Funds In 2022

Any investment plan has some advantages and some disadvantages. If you are a mutual fund beginner, then this information will be very useful for you.

Advantages of Mutual Funds

We will understand the benefits of Mutual Funds through the following points-

1. Facility of Professional Management

Whenever you buy a mutual fund, some money is deducted from your amount in the form of expense ratio. With this money, some part is given to a professional fund manager to manage your portfolio. The fund managers here with their knowledge and experience try to get higher returns with less risk for you.

As you know the expense ratio is very less. You can get the services of a professional for this very little cost. The reason for the low cost in mutual funds is that many people invest in a fund together, due to which the cost of managing that fund is divided among all the individuals.

2. Option to invest with less capital

If you want to invest directly in the stock market then you will need more capital. But you can take advantage of the returns of the stock market by investing in mutual funds with very little money.

The biggest advantage of mutual funds is that you can start a SIP with ₹500 or ₹1,000 as well. Even if you want to do Lam Sum, you can get Lam Sum from ₹ 1000 to ₹ 5000 according to your budget. You do not need a lot of money in this. Also, you will not have to wait to invest that when your income is high then you will invest.

3. Helpful in achieving goals

Through Mutual Funds, we can achieve our goals by investing systematically. These are considered to be the best benefits among mutual fund benefits.

For example, you can build a portfolio by setting goals for buying a car, buying a house. There are thousands of schemes available in the market, among them you can invest according to your investment needs and goals. You can achieve your goal by investing in the best mutual fund according to your goals.

4. Good Return and Power of Compounding. 

The biggest advantage of investing in Mutual Funds is that you get high and attractive returns in comparison to other investments in Mutual Funds.

Here you also get to see the power of compounding. The longer you hold your investment, the faster your returns will grow. SIPs are very popular because of their power of compounding.

5. Facility to invest in different types of schemes

There are many types or categories of mutual funds available in the market. Among them, you can choose any scheme according to your risk profile. You can choose the mutual fund scheme as per your requirement and goals.

Mutual Funds have options of schemes like Equity, Debt, Hybrid etc. Suppose you want to get good returns with risk then you can go with equity fund. Such investors who need very less risk can opt for debt funds.

6] Diversified Investment

One of the major advantages of Mutual Funds is that they invest your money in different sectors and assets, thereby diversifying your investments.

Suppose there is a recession in any sector like banking or auto sector, even then it will not make much difference to the entire portfolio because there will be little investment in this sector, which will not have any significant effect on the entire portfolio.

7. Easy to Invest

There are many investment options in which the process of investing is very complicated. But the answer to ‘how to buy mutual funds’ is very simple. You can easily invest in mutual funds yourself through the website of the asset management company, a mobile app or through an agent.

Nowadays many such platforms have been launched through which you can buy schemes of many mutual fund houses from one place such as groww app, Kuvera app, Cams etc.

Not only this, you can also easily compare and track the growth, returns etc. of your mutual fund scheme. Online investing has made investing in mutual funds even easier.

8. Low Cost of Investment

To invest you have to pay fees only in the form of expense ratio which is very less. Expense ratio remains around 1 to 2!^. In this way a professional fund manager manages your money at very low cost.

9. Time Saving With Mutual Fund

If you invest directly in the stock market then you have to constantly monitor the market movements. Also, you will have to take out time to do research and analysis, but this is not the case in mutual funds. All you have to do is invest and be sure. Even if you review your portfolio once in 6 months or even 1 year, your work will be done.

10. Safe Investment

The regulatory body of Mutual Funds is SEBI, which keeps strict control over them and forces them to follow the rules. Like RBI is the regulator of all banks, similarly the regulator of mutual funds is SEBI.
SEBI is a government institution that registers Mutual Fund Houses under itself. Therefore, your investment in mutual funds is 100% safe.

11. Ease of withdrawal/liquidity

Many times it happens that we make investments but due to some reason we need money in the middle and need to withdraw the invested money.
Many investment options have a lock-in-period due to which you cannot withdraw money from them without the lock-in period being exhausted. But there is no such problem in mutual funds. You can withdraw your money whenever you want. Usually, the money is credited to your account within 2 to 3 days from the date of withdrawal request.
Mutual Fund Tax Saver ELSS has a lock-in period of 3 years. The advantage of liquidity makes mutual fund schemes more popular.

Disadvantages of Mutual Funds

Every investment option has some advantages as well as some disadvantages. Similarly, mutual funds also have disadvantages. Disadvantages of Mutual Funds are explained through the following points –

1. Uncertainty of Return

Many investment options in the market offer you a fixed return. But this is not the case in mutual funds. The profit of Mutual Funds is directly linked to the stock market where there is always ups and downs.
The stock market always carries with it the uncertainty of risk. For this reason, the profits of mutual funds also keep fluctuating up and down.
If you are trying to earn good profits in less time from Mutual Funds then maybe you fail in it. If you keep this investment with patience for a long time, then you will definitely get big profits.

2. Cost of Mutual Fund

To manage the Mutual Fund, some of your investment money goes to the fund house in the form of Expense Ratio. This cost will cost you less for a short period of investment but it becomes very high in the long run.
Therefore, whenever you go to invest in any mutual fund scheme, get a thorough knowledge about its expenses.
If you redeem your mutual fund investment within a year, then you will get returns Of 1% Exist load also has to be given.

3. Lock-in Period

Although almost all mutual funds do not have a lock-in
 period. But there is lock-period in close ended schemes and ELSS schemes.
Therefore, you should invest only those funds in schemes with lock-in-period, which you do not need till that lock-in-period. Otherwise you may face problems when you need money.

4. Low Returns from the Stock Market

As you know, mutual funds are an indirect way to invest in the stock market. If you have good knowledge of stock market then you can earn much more returns than mutual funds by investing in direct stock market.
Over the long term, sane stock market returns tend to lower the returns of mutual funds. Because of this, mutual funds become a little less attractive.
But if you are an investor who does not have a good knowledge of the stock market, then mutual funds can be the best option for you.

5. Portfolio Review

Even if your mutual fund portfolio is managed by a professional fund manager. But as an investor you also have a responsibility to review your portfolio from time to time.
If any of your mutual fund schemes are underperforming, then you can review it and replace it with a better scheme.
But for an investor who has invested in mutual funds but does not know how to review mutual funds, then it can be problematic for him.
So it may be that he can stick with schemes that are consistently underperforming. Due to this, the investor does not get the returns that he expects.

6. Tax on Mutual Fund Returns

Your mutual fund returns are also taxed, due to which your profit decreases by some percentage.
In equities, you have to pay STCG tax at 15% (short term capital gain) for less than 12 months and LTCG tax at 10% (long term capital gain) for 12 months or more.
In this way, by investing in mutual funds for a long period, you may have to pay heavy taxes on the maturity amount. If you are also thinking of investing in mutual funds, then you should understand the disadvantages of these mutual funds properly.

Conclusion – Advantages and Disadvantages of Mutual Funds

Friends, investing is a very good habit and if invested wisely, it can give you great profits. If you invest wisely in mutual funds, then believe me you will definitely earn good returns in the long run.
You can become rich by investing in Mutual Funds but not in a short time. Friends, through this post, you got information about the Benefits of Mutual Fund Investment and the disadvantages of Mutual Funds. If you have any question in your mind then you can ask us through below comment box.
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