When it comes to investing, you should be aware of the benefits of mutual funds. After you’ve learned that, you’ll need to learn about the disadvantages. You can only choose the ideal mutual fund for yourself by weighing the benefits and disadvantage of various funds.

Advantages of mutual funds

1. Broadening your horizons

Diversification is a risk management strategy. Let’s pretend you only buy milk from one milkman. You won’t be able to drink milk if he becomes ill! If you buy milk from two milkmen, on the other hand, if one becomes ill, you’ll still be able to get milk from the other. It’s unlikely that both milkmen will become unwell at the same time. This is why, when it comes to investing, diversification is crucial.

The benefit of mutual funds is that diversification is done for you automatically. Instead of buying stocks, bonds, and other investments on your own, you hire a professional to do it for you.

2.Professional Management

Investing is clearly not a simple task. Investing in stocks, real estate, gold, bonds, and other assets is dependent on a variety of factors that must be regularly analysed and understood. Many people believe they have a good understanding of the market. A large number of these individuals lose money.

The benefit of mutual funds is that they are professionally managed. As a result, you must select the appropriate mutual fund to ensure that your money is invested wisely. Once you’ve invested in a mutual fund, you can rest easy knowing that a professional will make any necessary portfolio adjustments as needed.

3. Simplicity

The availability of knowledge and data is especially time-consuming while investing. Investing would be much easier if all information was readily available. The research and data collection for mutual funds is done by the funds themselves. All you have to do now is examine the results.

Mutual fund dealers let you compare funds based on a variety of criteria, including risk, return, and pricing. The investor will be able to make informed judgments because the information is readily available.

4. Availability of funds

Liquidity is a benefit of mutual funds that is often underestimated. Liquidity, in financial terms, refers to your capacity to turn your assets into cash with relative ease. For instance, if you wanted to sell your property, how long would it take you to sell it and receive the money? It could take anywhere from a few weeks to many months to complete.

Because many mutual funds are in high demand, they are called liquid assets. As a result, you can easily withdraw funds from a mutual fund.

5. Cost

In terms of pricing, mutual funds are one of the greatest investment options. When you engage a portfolio management firm, you’ll normally pay 2% to 3% of your overall investment each year. They’ll also take a cut of your profits.

Mutual funds are less expensive because they only deduct 1% to 2% of the expense ratio. Debt mutual funds, on the other hand, frequently deduct even less.

6. Tax Efficiency

Mutual funds are tax-efficient in comparison to other types of investing. Long-term capital gain tax on equities mutual funds is zero, which means you won’t have to pay tax if you sell your investment one year after buying it. Long-term capital gains apply to debt funds if you hold them for three years.

Aside from that, certain types of funds, known as ELSS funds, are exempt from tax under section 80 C up to a limit of Rs 1.5 lakhs. The following are some key characteristics of tax-saving funds:

  • It serves as a stepping stone to the direct stock market.
  • The minimal monthly investment is Rs 500.
  •  It has a three-year lock-in period.
  • The returns are also tax-free.

7. You Can Begin with a Small Amount

Unlike other assets such as real estate or equities, mutual funds allow you to start with a minimum commitment of Rs 500. You can begin investing in mutual funds with as little as Rs 500 or Rs 1000.

8. Automated Investment

Mutual funds are advantageous since they allow you to invest with less money. The Systematic Investment Plan, or SIP, is a good illustration of how money can be automatically deducted from your account. You can select a fund that best meets your investment objectives.

9. Reliable and open

Mutual fund investments are fairly transparent. SEBI regulates mutual fund businesses, and they are required to make certain disclosures. Stock prices, fund performance in the past, fund management qualifications, and track records are all known.

10.Option to choose SIP or Lumpsum

You can also invest in mutual funds using a SIP (systematic investment plan) or a flat sum.

11. Complement Your Personality

You can use sector mutual funds if you have greater knowledge about particular industries or sectors but not enough experience to know which company to invest in. You may ensure that your money is invested in a specific industry without having to investigate which firm to invest in by doing so. Sector mutual funds concentrate their investments solely in a single industry. Mining funds, energy funds, automobile funds, and other forms of sector mutual funds are common.

Disadvantage of Mutual funds

Below given are some of the disadvantage of mutual funds.

1.Cost is one of the disadvantage of mutual funds

A high cost is connected with some mutual funds. Mutual funds impose fees for things like fund management, fund manager salaries, and distribution costs, among other things. These fees can vary greatly depending on the fund. When you withdraw money from a mutual fund, you may be charged an exit load. Before you invest in a fund, make sure you understand the exit loads. Exit loads are usually imposed if you sell your investments within a certain time frame.

Investors should be aware that expense ratios vary amongst funds. Actively managed funds have higher expense ratios than passively managed funds like index funds or ETFs (Exchange Traded Funds).

Because passively managed funds do not require a fund manager to make active investing decisions, they mirror the underlying index. A mutual fund house’s operational efficiency is reflected in lower costs.

2.Dilution is another disadvantage of mutual funds

This is the most noticeable of all the disadvantages of mutual funds. Your assets will average out as a result of diversification. Diversification protects you from catastrophic losses while also preventing you from generating major gains! As a result, significant profits are diminished.

This is why it is advised that you do not invest in too many mutual funds at once. Mutual funds diversify investments by themselves. As a result, diversifying your gains by purchasing many mutual funds dilutes your gains.