Advantages and Disadvantages of Mutual Fund

By Ankit Jain
Nov 11th, 2017
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We will discuss about pros and cons of the mutual fund Investment, this could help in better understanding of Mutual Fund.

Pros and Cons

Benefit of Mutual Fund:

1) Professionally Managed:

Mutual funds are managed by fund manager who are experienced in handing different type of assets and investment. They reduce the burden of doing analysis and research. Individual Investor tends to act like trader rather than investor due to lack of skill and patience, which is majorly hazardous.

2) Well regulated:

SEBI (Securities and Exchange board of India) regulates mutual fund in India, to safeguard the interest of individual investor. All AMC (Asset Management Company) and mutual funds are approved by SEBI. AMFI (Association of Mutual Fund India) is association of registered AMC with SEBI. It is non-profit organization, which aims at safeguarding interest of investors and AMC.

3) Transparency:

All mutual funds daily publish the NAV (Net Asset Value) at their site and AMFI. Mutual Fund periodically publishes aggregate holding into various stock and bond. This detail is available at many places like Portfolio section of any Mutual fund of Money Control.

4) Diversification:

Mutual Fund invests into multiple sectors and multiple stock of each sector to prevent company specific risk. They aim to reduce risk of a company by offsetting it against its industrial sector. Diversification leads to reduced risk and reduction in return as well.

5) Availability:

Mutual fund can be purchased from different place on the basis of convince of investor. They can be purchased from AMC sites, stock brokers, banks, mutual fund specific avenues etc. We will discuss advantage of each of them in separate section.

6) Affordability:

Investment in mutual fund can begin with minimum investment of Rs 500 per month in SIP mode as low as Rs 1000 in lump-sum mode.

 

Disadvantages of Mutual Fund:

1) Control:

After selecting the fund, investor has very little control over the investment. He cannot change the allocation in specific sector or stock. Mutual fund theme cannot be changed on the basis of market condition like if market is moving to higher level, your investment in DEBT mutual cannot be increased to a specified level for equity and vice versa.

2) Perfect Fit:

One Size fits all is the approach of the investment in mutual fund, which is never the case. Each mutual fund is designed to cater the need of class of investors. So, Investor may needs to create a personal portfolio of Mutual Fund for their requirement.

3) Lock In Period:

Most funds come with a lock in period. If investor wishes to withdraw (redeem) the unit before the lock in period, they may be charged the exit load.

4) Transparency:

It is very difficult for investor to understand why fund manager invested in a particular sector or stock over other.

 

Other Aspect – Neither Advantage nor Disadvantage or Both

1) Cost:
  • Since, lot many people are putting money with MF, so they have economy of scale. They have very low cost of buying and selling a stock as compared to individual.
  • Most of the people cannot afford an individual portfolio manager, so mutual funds are very good in that regard.
  • Weather a fund perform or not performs portfolio management charges are deducted first and these charges are quite high when compared to the amount of fund managed. These are in range of 1.5% to 2.5% for most of the equity mutual fund and 0.5% to 1.5% for most of debt fund.
2) Optionality:
  • With so many option of mutual fund, it is easy for investor to choose from them.
  • With so many option of mutual fund, it is difficult for investor to distinguish between similar looking funds.

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