When it comes to systematic investment plans (SIP), mutual funds are considered one of the preferred choices of new investors. Mutual funds typically provide higher returns as compared to other traditional investments like bonds, fixed deposits, etc. Mutual funds investment is the best practice for newbie investors as it provides a diversified portfolio as well as most experienced fund managers to minimize investment risks.
But before you start investing in either of a mutual fund, you must know the pros and cons of mutual funds. Hence let us discuss the significant pros and cons of mutual funds on the basis of different perspectives.
Also read: Common Mistakes Committed by Mutual Funds Investors
Mutual Funds Pros and Cons:
Let us first understand what exactly are the mutual funds and how they work?
Mutual funds are those investment vehicles that collect money from a large number of investors and make a pool then invest such collective funds in the stock market in various financial securities.
Mutual funds are managed by Asset Management Companies (AMC) to provide vast categories of investment avenues so that investors may select according to their own interests and expectations.
Pros:
1) Minimum Amount to start:
The mutual funds provide an opportunity to invest as low as Rs 500/- only. This means you can start investing in mutual funds with just Rs 500/-, however, there are no upper limit criteria. Hence, mutual funds are affordable and convenient for any kind of person.
2) Professional Funds Management:
Mutual funds are managed by professional fund managers who have years of experience in stock market investing. Each mutual fund assigns a separate fund manager to manage such collective funds. Hence there is probably less investment risk as compared to those who directly invest in the stock market. The fund managers continuously monitor the stocks or other securities on behalf of their clients wherein the funds are invested.
3) Diversified Portfolio:
Mutual funds offer diversified portfolio means the funds are invested in different debt and equity securities such as equity shares, bonds, debentures, fixed deposits, etc. Therefore, the risk of loss is also significantly less in mutual funds due to the diversification of funds in different financial securities.
4) Liquidity:
The mutual funds offer high liquidity means you can withdraw your money whenever you want, in fact, it sometimes depends upon your action to sell it. You need only to give instructions to your broker to sell your mutual funds and money will be credited to your account within 48 hours.
Cons:
1) Lock-in Period:
There are basically two categories of mutual funds available: common mutual funds and equity-linked saving schemes (ELSS) mutual funds. In the case of ELSS mutual funds, the funds are locked up to 3 years, however, ELSS mutual funds offer tax benefits as well. On the other hand, in ordinary/ common mutual funds there is no such compulsion of the lock-in period.
2) Expense Ratio:
Mutual funds charge annual expense ratio as well as performance fees from their clients as funds performance fees which depend upon performance and types of mutual funds. In addition, there is also an exit load if the investor wants to withdraw his money prior to a defined time period.
Conclusion:
In a nutshell, we can conclude that mutual funds offer there major advantages like a higher rate of returns, affordability, liquidity and the investor needn’t do his own research such as collecting updated information and monitoring specific stocks or other financial instruments and other stock market fundamentals.
However, the cons side of mutual funds is fees which you will have to pay to the mutual fund companies for the management of funds.