19 Key Advantages and Disadvantages of Mutual Funds

Mutual funds are turned to be the most preferred choice worldwide for both small and big investors due to their numerous advantages. It is all about long term financial planning. These benefits mainly include diversification, professional management, the potential of returns, efficiency, and easy to use.

advantages and disadvantages of mutual funds
advantages and disadvantages of mutual funds

Mutual fund investment carries low risk because of their diversified nature.

It is important to understand the benefits of mutual funds before investing the money you really care about.

Advantages of Mutual Funds

The advantages of mutual funds are as follows:

1. Transparency

Mutual funds transparently declare their portfolio every month.

Thus, an investor knows where his/her money is being deployed and in case they are not happy with the portfolio they can withdraw at a short notice.

2. Diversification

An investor undertakes risk if he invests all his funds in a single scrip/Mutual funds invest in a number of companies across various industries and sectors.

This diversification reduces the risks if the investments.

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3. Research

Mutual funds can afford information and data required for investments as they have a large number of funds and equity research teams available with them.

4. Professional Management

An average investor lacks the knowledge of capital market operations and does not have large resources to reap the benefits of investment.

Hence, he requires the help of an expert.

It is not only expensive to hire the services of an expert but it is more difficult to identify a real expert.

Mutual funds are managed by professional managers who have the requisite skills and experience to analyze the performance and prospects of companies.

They make possible an organized investment strategy, which is hardly possible for an individual investor.

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5. Convenience

Investing in mutual funds reduces paperwork, saves time, and makes investment easy.

6. Stability

Mutual funds have a large number of funds which provide them economies of scale by which they can absorb any losses in the stock market and continue investing in the stock market.

In addition, mutual funds increase liquidity in the money and capital market.

7. Tax Benefits

Mutual fund investors now enjoy income tax benefits.

Dividends received from mutual funds debt schemes are tax-exempt to the overall limits.

8. Flexibility

Mutual funds offer a family of schemes, and investors have the option of transferring their holdings from one scheme to the other.

9. Affordability

Compared to direct investing in the capital market, investing through the funds is relatively less expensive as the benefits of economies of scale are passed on the investors.

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10. Liquidity

Often, investors cannot sell the securities held easily, while in case of mutual funds, they can easily encash their investment by selling their units to the fund if it is an open-ended scheme or selling them on a stock exchange if it is a close-ended scheme.

Disadvantages of Mutual Funds

Following are some of the disadvantages of mutual funds:

1. No Promise for Minimum ReturnsĀ 

Many of the investors are not willing to invest in mutual funds unless there is a promise of a minimum return.

2. Unrestrained Fundraising

Unrestrained fundraising by schemes without an adequate supply of scripts creates a severe imbalance in the market.

3. Low Investment In Small Industries

Many small companies did very well but mutual funds cannot reap their benefits because they are not allowed to invest in smaller companies.

limitations of mutual fund
limitations of mutual fund

Not only this, but a mutual fund is also allowed to gold only a fixed maximum percentage of shares in a particular industry.

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4. Increasing Competition

The increase in the number of mutual funds under various schemes has increased competition.

As a result, the funds lose their stabilizing factor in the markets.

5. Financial Clout

The mutual funds have eroded the financial clout of the institutions in the stock market for which cross transactions between mutual funds and financial institutions not only allow speculators to manipulate price but also provide cash leading to the distortion in the balanced growth of the market.

6. Relations with Investors

Investor relations play a vital rote in mobilizing the resources.

Most of the Indian companies and mutual funds have ignored this and failed to communicate with the investors about their organization and operation.

7. Bad Distribution Network

Unlike banks, mutual funds do not have a strong distribution network.

Apart from a few, most Mutual funds have to depend on the broker networks.

8. Product Structuring

Mutual funds have not yet developed product structuring to tap target customers.

9. Raising Risk Profiles

Fund managers invest in unlisted securities, sometimes in private limited companies to get better returns which leads to new risk profiles.

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