What is a disadvantage of owning a mutual fund?
Mutual funds come with many advantages, such as advanced portfolio management, dividend reinvestment, risk reduction, convenience, and fair pricing. Disadvantages include high fees, tax inefficiency, poor trade execution, and the potential for management abuses.
Disadvantages of Investing in Mutual Funds
Lack of Control: Investors have limited control over specific investments made by the fund manager. Market Risk: The value of mutual funds can go up and down, just like the stock market. This means that you may lose money if you invest in a mutual fund.
The disadvantages associated with investing in mutual funds are generally operating expenses, marketing, distribution charges, and loads. Loads are fees paid when investors purchase or sell the shares.
Downside risk is an estimation of a security's potential loss in value if market conditions precipitate a decline in that security's price. 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.
- Fluctuating returns. Mutual funds do not offer fixed guaranteed returns in that you should always be prepared for any eventuality including depreciation in the value of your mutual fund. ...
- No Control. ...
- Diversification. ...
- Fund Evaluation. ...
- Past performance. ...
- Costs. ...
- CAGR. ...
- Fund managers.
The Bottom Line
One selling point is that they allow you to hold a variety of assets in a single fund. They also have the potential for higher-than-average returns. However, some mutual funds have steep fees and initial buy-ins. Your financial situation and investment style will determine if they're right for you.
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.
All investments carry some degree of risk and can lose value if the overall market declines or, in the case of individual stocks, the company folds. Still, mutual funds are generally considered safer than stocks because they are inherently diversified, which helps mitigate the risk and volatility in your portfolio.
Only Fixed return is not guaranteed in case of Mutual Funds. Rest all are advantages of Mutual Funds.
- Entry or Exit Load. Some mutual funds may charge either entry or exit load or both. ...
- Diversification Might Cause Lower Profits. ...
- Difficult Phases. ...
- Liquidity. ...
- Capital Gains Tax.
How do you check a mutual fund is good or bad?
Check the Expense Ratio of Funds
The expense ratio is a vital parameter to consider when analysing mutual fund performance. It represents the annual fees and expenses charged by the fund company for managing the fund. A higher expense ratio can significantly impact investment returns over the long term.
Money market mutual funds = lowest returns, lowest risk
They are considered one of the safest investments you can make.
- SBI Mutual Fund.
- ICICI Prudential Mutual Fund.
- HDFC Mutual Fund.
- Aditya Birla Sun Life Mutual Fund.
- Kotak Mahindra Mutual Fund.
- Nippon India Mutual Fund.
- Axis Mutual Fund.
- UTI Mutual Fund.
Low Expense Ratio
Most people tend to take the help of their preferred mutual fund advisor or their local financial advisory service provider when investing via regular funds.
Are mutual funds safe? All investments carry some risk, but mutual funds are typically considered a safer investment than purchasing individual stocks. Since they hold many company stocks within one investment, they offer more diversification than owning one or two individual stocks.
Utilizing a Broker or Distributor
If you invested through a broker or distributor, you could withdraw money from a Mutual Fund plan through them. Contacting your broker and requesting a withdrawal are options. You must complete and submit a withdrawal request form if you want to withdraw offline.
Over-Diversification of Mutual Funds
The aim of diversification is to spread risk. If you invest too much in one company's stock, you are at great risk. If something happens to that company, a significant portion of your money could get wiped away.
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.
|1-year return (%)
|Axis Value Fund
|SBI Long Term Equity Fund
|HDFC Multi Cap Fund
|Kotak Multicap Fund
Mutual funds have sales charges, and that can take a big bite out of your return in the short run. To mitigate the impact of these charges, an investment horizon of at least five years is ideal.
Has anyone lost money in mutual funds?
One of the prominent reasons for mutual fund loss is a need for more knowledge about the investment options and market. Individuals who invest in mutual funds without proper research often end up in a situation where they have to face a loss of money.
- Returns Not Guaranteed. ...
- General Market Risk. ...
- Security specific risk. ...
- Liquidity risk. ...
- Inflation risk. ...
- Loan Financing Risk. ...
- Risk of Non-Compliance. ...
- Manager's Risk.
Usually, closed-ended mutual funds have a lock-in period that can range from a few months to 3-5 years. Open-ended mutual funds except the ELSS instruments are fairly liquid. You can withdraw from a mutual fund scheme anytime after its lock-in period is over.
The owners of mutual funds are the Professional money managers who collects fund from retail investors and put them in share on the name of their mutual fund company.
The Fund Sponsor
SEBI regulations say that a fund sponsor is any person or any entity that can set up a Mutual Fund to earn money by fund management. This fund management is done through an associate company which manages the investment of the fund. A sponsor can be seen as the promoter of the associate company.