Advantages and Disadvantages of Mutual Fund Investments

Mutual fund is an investment vehicle that pools money from investors and invests the accumulated corpus in a wide range of capital market securities. With a large section of the Indian population becoming more conscious about economic well-being, mutual funds have emerged as a favorable financial planning tool. The mutual fund industry in India is thus experiencing an exponential growth rate.If you are planning to invest in mutual funds, it is necessary that you must be aware of certain advantages and disadvantages of mutual funds. This will help you in making right decisions and getting better returns on investments.Let us look at a few of the many advantages of investing in mutual funds:

1. Investment Management A mutual fund is basically an established trust that appoints a fund manager to manage the scheme's portfolio. The fund manager or the portfolio manager looks after the investments made on behalf of the investors. The delegated manager is usually an experienced professional and is backed by an adept research team. Investors thus benefit from active and competent management of their funds.
2. Risk Diversification The old adage 'Don't put all your eggs in one basket' perfectly applies to the concept of mutual funds. Mutual funds help investors in distributing their exposure to a single security or category of assets, thereby spreading their risk-bearing.
3. Flexibility Mutual fund investors enjoy the convenience of quick entry and easy exit (except for in close-ended schemes) along with automated payments, user-friendly transaction process. Mutual funds come with an array of investment options like Systematic Investment Plan (SIP) , Systematic Withdrawal Plan (SWP), Systematic Transfer Plan (STP), etc. Investors can also opt between receiving dividend or letting it get reinvested as fresh units in the scheme.
4. Other Benefits Other advantages include transparency and safety due to regulations imposed by SEBI & AMFI, low transaction cost due to economies of scale and a wide range of schemes designed keeping in mind the most common investment goals of investors like tax-saving or parking of surplus funds, etc.

As lucrative as they sound, the statutory disclaimer warning in mutual fund advertisements rightly points out - mutual fund investments are subject to market risks. Not just market risks, mutual funds, like every other investment avenue, have their cons, namely:

1. Lack of Control Investors cannot be in full and direct control of where their money is being invested. They can only passively monitor the portfolio of the scheme. Although each fund is transparent about the proportion of their asset allocation (say 30% debt and 70% equity) and puts out details about the specific securities in the portfolio, dividend payout, expense ratios, etc. there is only so much control an investor can have. The investor does not have a direct say in the management of the funds.
2. Expenses The professional management of the fund's portfolio by the fund manager comes with a hefty fee. There are many other expenses that a mutual fund trust incurs like massive advertising costs, distributor's commission, administration expenditure, etc. All these costs are deducted from the fund's net assets and contribute to bringing down the NAV of the fund.
3. Management misuse If your manager misuses his/her authority, it can lead to churning, window dressing and turnover. General misuse of authority includes unnecessary trading, unreasonable replacement, etc.

Investors must take a detailed look into the potential advantages and disadvantages of mutual funds before making an investment decision.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.