The Pros and Cons of Investing in Mutual Funds

There has been a steady growth in the mutual fund industry in recent years. In fact, for the mutual fund industry, the total Assets Under Management grew from ₹ 22.86 lakh crore in June 2018 to ₹24.25 lakh crore in June 2019, according to information provided by the Association of Mutual Funds in India. There are a number of reasons behind mutual funds being so popular among Indians.

The Pros and Cons of Investing in Mutual Funds

Here is a list of pros of investing in mutual funds:

Advantages of Mutual Funds

1.     Diversification of Portfolio

One of the biggest benefits of investing in mutual funds is portfolio diversification. When you invest in mutual funds, your money is invested in a number of different securities, across various sectors. This helps in reducing the risk caused because of the volatile nature of the market. With mutual funds, you also have the option of diversifying into equity and debt funds.

2.     Tax Benefits

There is also certain tax saving mutual funds, such as Equity Linked Savings Scheme (ELSS). ELSS is one of the best tax saving mutual funds. Under Section 80C of the IT Act, the investments made in these schemes qualify for tax benefits of up to ₹ 1.5 lakhs.

3.     Expert Management

A key benefit is that you do not have to conduct any asset allocation or research on your own. All your investments are handled by experienced fund managers. The fund managers constantly study the market and different companies to have a better understanding of the trends. Based on your income, risk profile and savings goals; they will invest your money into suitable assets.

4.     Small Investments

With mutual funds, you have the advantage of investing through SIP. Systematic Investment Plans allow you to make small regular investments instead of making lump sum payments. You can start with as low as ₹ 500. This makes investing in them much easier. SIPs also provide you the advantage of rupee cost averaging, reducing the risk associated with investing in mutual funds. There are certain tax saving SIPs as well.

Cons of Mutual Funds

Mutual funds carry some risks and disadvantages as well.

Management Cost

It is a great benefit that mutual funds are managed by experienced professionals, but it comes at a price.  There is a fee that is charged for the administration and management of the mutual funds. This fee is known as expense ratio, and is generally between 0.5% and 1.5%. The expense ratio cannot be more than 2.5%.

Market Risk

With mutual funds, there is the potential of earning high returns of up to 15 to 18%. But there is also a degree of risk associated with them, since they are dependent on the market performance. Therefore, before investing, one must remember that the returns are not guaranteed on mutual funds.

It’s good to research well before investing. For instance, tax saver schemes can come with lock-in periods.  Or that debt funds could be less risky than equity mutual funds. Being informed is necessary to make good financial decisions.

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