Imagine you want to start investing, but you're unsure how to proceed. That's where Mutual Funds come into play. They function as large pools of money collected from lots of people, including you if you decide to participate. Instead attempting to determine where to invest your money all by yourself, you let professionals handle it for you. They allocate your funds across various asset classes like stocks, bonds, real estate, and gold.
Mutual funds have emerged as a popular investment option in India due to the array of benefits they provide to investors. However, before diving in, it's vital to be understand certain factors, including both the advantages and disadvantages of mutual funds.
Benefits
Professional Management: Investing in Mutual Funds means entrusting your money to skilled professionals. The expertise of fund managers is invaluable, particularly for those who lack the time or knowledge to manage their investments actively.
Diversification: The cornerstone of Mutual Funds lies in diversification. By investing in a range of securities, Mutual Funds help spread out risk, minimizing the impact of underperforming investments.
Liquidity: Mutual Funds stand out for their liquidity. You can easily redeem your investments in open-ended funds and get your money within 3 working days from the date of redemption.
Tax Reduction: Investing in certain mutual funds like an ELSS can help you reduce your tax liability by getting a tax deduction of Rs 1.5 lakh annually from your income. They also have a shorter lock-in period of 3 years among other investment options eligible for tax exemption.
Affordability: Many investors have a myth that investing in mutual funds requires a large initial investment. But the fact is you can start a SIP with just Rs 100. In the case of a lump sum, you can start with Rs 5000 investment with a subsequent purchase of Rs 1000.
Safe and transparent: Regulated by the Securities and Exchange Board of India (SEBI), Mutual Funds offer a high level of transparency and security, ensuring investors are well-informed about their investments.
Limitations
Costs: While the benefits of professional management are significant, they come with a cost. Mutual funds charge expenses to manage your funds which are adjusted in the NAV. These expenses can eat into your returns, making it crucial to choose Mutual Funds with reasonable fees.
Exit load: Certain mutual funds impose an exit load if investors redeem their investment, either partially or fully, within a specified period from the investment date. The aim is to discourage investors from redeeming their investment within a short period. This fee essentially serves as a lock-in period to maintain stability in the fund.
Over-diversification: While diversification is a fundamental strategy to mitigate risk in investment portfolios, over-diversification can potentially dilute returns. Excessive diversification may spread investments too thinly across a wide range of assets, limiting potential gains.
Volatile returns: Mutual funds are prone to volatile returns as they invest in market-dependent assets like stocks and bonds. Market fluctuations directly impact their performance, offering opportunities for gains but also posing risks of losses.
To conclude, Mutual Funds offer numerous benefits, including professional management, diversification, liquidity, and tax efficiency. However, it's crucial to consider factors like costs, exit loads, over-diversification, and volatility before investing in them. Understanding the advantages and disadvantages of mutual funds will indeed help you make informed investment decisions.
Also Read: [How to build a strong Mutual Fund portfolio]
FAQs
Why invest in Mutual Funds?
Mutual Funds offer a balanced blend of professional management, diversification, and liquidity, making them an attractive option for both novice and experienced investors seeking to grow their wealth.
Can you lose money in Mutual Funds?
Yes, it is possible to lose money in Mutual Funds. They invest in various assets such as stocks, bonds, and commodities, and their value fluctuates based on market conditions. If the value of the underlying assets in which the mutual fund invests decreases, the NAV of the mutual fund may also decline, resulting in losses for investors.
What factors should you consider when choosing the best mutual fund scheme?
When selecting a Mutual Fund, consider factors such as the fund's performance history, the expertise of the fund manager, the fund's investment strategy, and its fee structure.
What strategy should you employ to maximize returns from Mutual Funds?
Diversify your investments, choose funds with strong performance records across market cycles, a strong investment pedigree, and reasonable expense ratios, and consider your risk tolerance and investment horizon to maximise returns.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.
