Any method of generating savings or an investment plan has its own benefits. It can be either for the short term or the long term. Investors in India usually want to invest in mutual funds because of their risk management.
In this article, we will learn about the advantages and disadvantages of mutual funds in India.
Advantages of Mutual Funds in India
The advantages of mutual funds in India have been enumerated below:
Mutual Funds are Managed by Asset Managers Professionally
The fund house appoints asset managers, also known as fund managers, to manage the mutual funds in India. These managers understand how to identify the best stocks that can generate maximum profits.
The Risk Gets Reduced through Diversification
The money in mutual funds is invested in multiple sector stocks. Hence, the loss incurred in one asset class is managed by profit made in another sector or asset class.
One advantage of mutual funds that is often overlooked is liquidity. Mutual funds can be easily bought and sold in the short term during market hours and, hence, are considered highly liquid. Some funds like ELSS are an exception as they have a specified lock-in period and cannot be easily liquidated.
Mutual Funds are Low Cost
Mutual funds in India also have low costs. The fund management fees charged by mutual funds are 1%-2.50%. Mutual funds, though low in cost, provide you with higher returns. Returns are calculated based on the amount grown within the given time frame.
Mutual Funds also Offer Tax Benefits
Investing in mutual funds in India via the equity market can offer you tax benefits. The investments made in ELSS are exempted under Section 80C of the Income Tax Act, up to Rs. 1.5 lakhs.
Mutual Funds are Affordable
You can start investing in mutual funds from a minimal amount, such as Rs. 500. As per your budget, you can opt for SIP or lumpsum investment.
Investments in mutual funds are very transparent. All mutual fund companies come under the purview of SEBI and they need to make necessary disclosures.
Value of stocks, the historical performance of the fund, fund manager’s qualification, and track records are known. The NAV (net asset value) of the fund is updated every day. On any mutual fund page like Groww – you can look at the details about the mutual fund.
You may also want to know the Best Mutual Funds To Invest in India
Disadvantages of Mutual Funds in India
There are some disadvantages to mutual funds, and we have discussed some of them below:
Although costs were an advantage in the section above, they are equally disadvantageous in mutual funds. Some mutual funds in India have high costs associated with them. If you exit before the stipulated time, you will have to incur exit charges. You cannot withdraw the amount before the given time frame.
Though diversification of funds saves you from incurring a loss, it can also be a disadvantage as it can prevent you from gaining significant profits. Some sectors give huge profits, so not investing much in them can be a big loss for you.
The lock-in period can sometimes prove to be a significant disadvantage as you cannot withdraw your money before the specified time. Hence, in case of emergencies, you cannot liquidate your invested amount.
Mutual fund returns are not guaranteed as they keep fluctuating according to the market conditions. Hence, investors must be aware of the risk profile of the fund before investing.
Key Takeaways
- You can invest in mutual funds with as little as Rs. 500 per month.
- Money can be invested every month or week or daily via systematic investment plans (SIP) as per your budget.
- The investment manager manages the portfolio and makes investment decisions on your behalf.
- Mutual funds up to Rs. 1.5 lakhs are tax exempted as per Section 80C of the Income Tax Act.
- If you sell your investments within the stipulated time, exit loads are applicable.
- Mutual funds do not guarantee returns as they depend entirely on the market.
- Some mutual funds have a lock-in period of 3 years, and, therefore, money cannot be withdrawn before the stipulated time.
Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.
FAQs
Some of the advantages of mutual funds include advanced portfolio management, dividend reinvestment, risk reduction, convenience, and fair pricing, while disadvantages include high expense ratios and sales charges, management abuses, tax inefficiency, and poor trade execution.
What are the pros and cons of mutual funds in the context of Indian financial system? ›
Mutual funds can be good for diversification and professional management, but their performance is influenced by market conditions. It's essential to align investments with individual goals and risk tolerance. Is mutual fund SIP safe? Mutual fund SIPs are considered relatively safe for long-term investors.
What are the problem of mutual fund in India? ›
There is a lack of product conceptualization and innovation. Weak distribution and marketing channels are another problem which the mutual fund industry are facing today. The merchant banking industry is not sufficiently matured and this has led to slow development of mutual fund industry.
What are the benefits of investing in mutual funds in India? ›
Variety of investment objectives: One of the advantages of mutual fund investing is that you can meet various types of investment objectives like capital appreciation and income. Equity mutual funds can help you create wealth through capital appreciation, while debt mutual funds can generate income for you.
What is downside in mutual fund? ›
Downside risk is a general term for the risk of a loss in an investment, as opposed to the symmetrical likelihood of a loss or gain. Some investments have an infinite amount of downside risk, while others have limited downside risk.
What are the risks of mutual funds? ›
All funds carry some level of risk. With mutual funds, you may lose some or all of the money you invest because the securities held by a fund can go down in value. Dividends or interest payments may also change as market conditions change.
What is the main advantage of mutual funds? ›
Mutual funds offer diversification or access to a wider variety of investments than an individual investor could afford to buy. There are economies of scale in investing with a group. Monthly contributions help the investor's assets grow. Funds are more liquid because they tend to be less volatile.
Why mutual funds are performing bad? ›
High Costs and Fees
Top-performing funds often have higher costs, eroding your returns, especially in the long run. Management fees, transaction costs and other expenses can significantly reduce the net return on investment. So, consider the cost-to-benefit ratio of high-performing funds.
What are the disadvantages of mutual funds in demat account? ›
One of the big disadvantages is that investors have to incur additional costs related to the maintenance of the demat account, which is levied by the broker. Demat units are serviced only by the depository and investors cannot transact with the fund house or the registrar.
Are mutual funds safe in India? ›
Mutual funds are regulated by SEBI (Securities and Exchange Board of India), adding a layer of safety via implementing mandatory guidelines and safeguarding policies. Mutual funds are obligated to disclose their portfolio holdings and performance regularly, ensuring transparency.
Mutual funds are managed and therefore not ideal for investors who would rather have total control over their holdings. Due to rules and regulations, many funds may generate diluted returns, which could limit potential profits.
Is it normal to lose money in mutual funds? ›
If you are wondering can mutual funds lose money, then the answer is yes as some mutual fund categories are more volatile. This means, while they might offer great returns, they can also offer higher risk. If you feel you are not up for the risk, you should look at the performance of mutual funds from other categories.
Which type of mutual fund is best to invest in India? ›
Equity mutual funds are the best option for long term investment. Based on your risk-taking capacity, investment can be made in other sub-categories within equity mutual funds, such as large cap funds, mid-cap funds, and small-cap funds.
What is the average return on mutual funds in India? ›
The average ten-year return on mutual funds in India is 20%. Mutual fund performance is directly correlated with market dynamics.
How do mutual funds work in India? ›
A mutual fund is a professionally managed investment scheme that pools money from multiple investors and invests it in a diversified portfolio of stocks, bonds, or other securities. These funds are managed by professional fund managers who make investment decisions on behalf of the investors.
What are the advantages of mutual funds? ›
Mutual funds offer several benefits to investors, including professional management, diversification, liquidity, low cost, tax benefits, affordability, safety, and transparency. However, investors need to consider several factors before investing in mutual funds.
What is a basic advantage of a mutual fund? ›
Mutual funds give you an efficient way to diversify your portfolio, without having to select individual stocks or bonds. They cover most major asset classes and sectors.
What is the primary advantage of mutual funds? ›
Answer and Explanation: The correct answer is option B. mutual funds allow people with little money to diversify. Diversification is enhanced through the exposure of a multitude of stocks.
