Advantages and Disadvantages of Investing in Mutual Funds

Smart money management is a term that most people have lit their dictionaries up with. It includes investments and savings via other means too. Most of you would be involved with tremendous levels of investments including buying of gold, stocks and shares, FDs etc. Mutual fund is a growing segment in the world of investments. If you notice it carefully, you would know that mutual funds have grown popular currently with stocks being claimed as risky and gold prices lowering by the day.

Advantages and Disadvantages of Investing in Mutual Funds

What is Mutual Fund?

It is a pool of security offered to your money. It is termed as a collective investment vehicle wherein your money is used to purchase various securities. The funds that you give out to a certain company are basically used to invest in a few areas like out shares to increase your funds. You would not really know where your money is pooled in but, all you are to know is that your money would be doubled by the end of a certain period mentioned on the offer document. There are basically three kinds of mutual funds: open ended funds, unit investment trust and closed ended funds.

The Advantages

1. Diversification
The funds are not allocated within a single stock or share. In this case, if you invest in mutual funds you would be able to reap the benefits of the various stocks and shares. In fact the risk is lowered with the fund diversification leading to increase in the returns. Also in this case the case would be rare that all the shares shout out loses so, you might just get the money invested returned
2. Professional management

When you try and invest in stocks, you may not be aware of the actual returns. Hence you would end up investing in the wrong stock or share. A professional would always help invest in the right bonds. Also, the professional would know which bond would do good for you. So, your money is safe and well invested in the hands of a professional.
3. Minimal transaction costs

When you go in for a single equity bond or share, you might end up spending heavily on transaction cost. With mutual funds, the best part is that your money would be invested along with those of others. So, in a way the transaction cost of multiple buying is always less. So, transaction cost would not hit your pockets in a heavy manner.
4. Liquidity

The investment or return in case of mutual funds is always liquid. You would see that you would be earning more on a single stock or share. In fact, if you sell a single stock or share you would be able to get liquid money in return. So, this pays off well.
5. Flexibility

When you invest in a single bond or share, you won’t be able to get liquid returns as is in the case of the mutual fund investment. In fact, you won’t be able to release a cheque when signing for a single stock or share. With mutual funds, you can write a cheque in favour of the company and, release the cash for this purpose.
6. It’s Convenient
This is the most convenient way of dealing with investments. You are saved off the daily involvement in the share buying and selling. Also, you need not bother yourself with the minute detailing of investment except choosing a particular mutual fund company that matches your need.
7. Low upfront costs

When buying or selling shares or bonds individually, you may incur some costs. These costs are avoided when you invest in mutual funds. No sales charges are accounted for in case of no load funds. You can always purchase open funds at net asset value. So basically the extra money is saved while investing in mutual funds.
8. Services

The customer service in case of a mutual fund is extensive. Your queries, even the simplest ones are solved when you visit the customer service desk of a mutual fund provider. The after sales service and queries related to investment are instantaneously attended to and solved at the service desk.

 

The Disadvantages

1. High Costs Involved

If you are not aware of the going rates of a mutual fund, you may end up paying higher costs while purchasing a benefit. The management fee, the custodial fee as well as transfer fee would add up to the overall cost of mutual fund. This would in turn reduce your returns on the fund you have invested.

2. Risk Factor

You would always find this line on a mutual fund saying mutual funds are subject to market risk. When you invest in very concentrated portfolios chances are that you would suffer a heavy risk. There is always this fear that might turn into reality leaving you in an odd situation
3. Tax Plans not Possible

It would be slightly impossible to plan your taxes given that you are unaware of your returns. In case of loses, you would not be able to pay taxes and, also there would be no taxes. If you earn too much, your taxes would be heavy getting you into a pitfall. Thus planning seems impossible when dealing with mutual funds.
4. New Investor Issues

When a new investor walks into the mutual fund world, a current investor might lose the value. Purchasing new funds is very difficult and expensive. So, the new investor funds are pooled in with current investor thus diluting the latter’s funds
5. Premium/Discount Liability

This makes the entire deal tad expensive. When you are dealing with closed ended funds, you may have to pay slightly higher than the net asset value thus making it a premium amount for you. Also if the value of a particular mutual fund is higher in terms of demand, the investor would end up paying a huge premium. This would turn into disadvantage wherein the investment costs him much higher than the actual savings he would receive.

The entire essence of investment is enhanced with mutual funds. A good option for investment!

Leave a Reply

Your email address will not be published. Required fields are marked *