Mutual Funds are perfect for beginners. But you shouldn’t invest blindly in mutual funds. Like everything else, you need to know the important advantages and disadvantages of mutual funds before investing your hard-earned money.
Investors will require a large capital outlay to build a diversified portfolio of stocks. On the other hand, since mutual funds work on the basis of pooling of money, mutual fund investors can have the beneficial ownership of a diversified portfolio of stocks with a much smaller capital outlay. Investors can buy units of a diversified equity mutual fund with an investment as low as Rs 5,000/- only or even lower at Rs 500 for ELSS schemes.
Mutual Funds are professionally managed companies or schemes that pool money from investors and invest it in stock markets, shares,
derivative markets and other securities. By investors can avail of the following advantages:
These schemes offer tax rebates to the investors under specific provisions of the Indian Income Tax laws as the Government offers tax incentives for investment in specified avenues. Investments made in Equity Linked Savings Schemes (ELSS) and Pension Schemes are allowed as deduction u/s 88 of the Income Tax Act, 1961. The Act also provides opportunities to investors to save capital gains 54EA and 54EB by investing in Mutual Funds.
Mutual Funds offer a family of schemes to suit an investor’s varying needs over a lifetime. For e.g. Growth schemes are ideal for investors having a long-term outlook seeking growth over a period of time. Income Funds are ideal for capital stability and regular income. Balanced Funds are ideal for investors looking for a combination of income and moderate growth. Money Market Funds are ideal forbcorporate and individual investors as a means to park their surplus funds for short periods.
Mutual funds provide investors with professional management, but it comes at a cost. Funds will typically have a range of different fees that reduce the overall payout. In mutual funds, the fees are classified into two categories: shareholder fees and annual operating fees. Theshareholder fees, in the forms of loads and redemption fees are paid directly by shareholders purchasing or selling the funds. The annual fund operating fees are charged as an annual percentage – usually ranging from 1-3%. These fees are assessed to mutual fund investors regardless of the performance of the fund. Mutual funds are subjected to market risks or assets risks. If the investment is not sufficiently diversified, it may involve huge losses.
Over medium to long-term, Mutual Funds have the potential to provide a higher return as they invest in a diversified basket of selected
securities.