Investing in Mutual funds give plenty benefits to the Investors.Mutual funds have some negative festures /disadvantages too.In this Page Advantages & Disadvantages of Mutual Funds be discussed here.Before Going to Invest with any Instrument should be aware of the positive and Negative Features Of that Investment Instrument.
Small Amounts:
Investing in mutual funds is not restricted to investors who have large funds. Even small investors with small amounts can enjoy the benefits of investing in mutual funds. For example, an investor who has low savings can invest minimum amount of
Rs.100 in mutual funds every month.
Diversification:
Diversification reduces the risk as all investment avenues don’t move in one direction at the same time at the same proportion.If the equity market is going down,the debt market may move up.Therefore,holding a portfolio that is diversified across investment avenues is a wise way to manage risk.It also enables investors to evaluate the portfolio continuously and manage risks more efficiently.
Professional Management:
Mutual funds are managed by fund managers who trade invested Money by investing them in stocks, bonds etc.Most of the investors don’t have time or expertise in managing their investments.They therefore prefer to rely on investment advisers.The fund manager should have good knowledge and access to market information,bounded by rules issued by regulatory agencies.The adviser should be able to decide and help investors in investing funds in such instruments that give maximum return to the investors with moderate or less risk.
Reduction of Transaction Costs:
Mutual funds involve large transactions,the transaction costs are comparatively lower.Mutual funds provide the investors the advantage of economies of scale thereby reducing the transaction costs.
Liquidity:
Most of the funds today are open-ended.That is,investors can sell their existing units or buy new units, at any point of time, at prices that are related to the NAV of the fund on the date of the transaction. This enables investors to enjoy a high level of liquidity on their investments. Since investors continuously enter and exit funds, funds are actually able to provide liquidity to investors, even if the underlying markets, in which the portfolio is invested, may not have the liquidity that the investor seeks.For example, the debt markets are wholesale markets, where minimum trade lots are Rs.25,000 on wards.However,investors in debt funds can invest as little as Rs.500, and withdraw the same at NAV-related prices, at any time.
Convenience and Flexibility:
Mutual funds offer various services that help in easy investment. Investors can buy or sell shares at any time, in any way either through mail, internet, or telephone. There is also an option of systematical investment or withdrawal of funds according to one’s needs and convenience.
Choice and Tax Benefits:
With the developing mutual fund industry, a number of schemes are available to the investors. Investors now have a choice of selecting schemes based on their funds, expected returns, time period and so on. At the same time investing in mutual funds provides investors tax benefits. Dividends received are also tax-free.
DISADVANTAGES OF MUTUAL FUNDS
There are certain disadvantages in Mutual Funds too.The following are some of the disadvantages of investing through mutual funds
No Guaranteed Returns
Mutual funds are like any other investments that do not
generate any guaranteed returns.Mutual Funds are market based,due to the market relationship,Mutual Fund Investments are no Guaranteed returns.Unlike other fixed income securities, mutual funds
experience depreciating returns.
No Control Over Costs
Mutual funds usually have different kinds of fees that reduce
the overall pay out. The fees may be of two types (i) shareholders’ fees that are in the
form of redemption and load fees and are paid by the shareholders, and (ii) annual fund
operating fee that is charged as an annual percentage usually ranging between 1 – 3%.
These fees are charged to the investors irrespective of the performance of the mutual
fund.Since investors do not directly monitor the fund’s operations they cant control
the costs effectively.
Evaluating Funds
Another disadvantage faced by the investors is in terms of evaluating
the funds. Unlike other funds, mutual funds sales growth, earning per share etc., are not
given. The performance of the fund is based on the Net Asset Value of the fund.
Related Articles :
No comments:
Post a Comment