Mutual Funds Advantage And Disadvantage

In easy words, mutual funds are investment tools that pool money from various investors to invest in distinct portfolios of stocks, bonds and such other investment securities. Thee mutual funds are managed by professional fund managers who make profound investment decisions on behalf of the investors. Mutual funds is basically a trust that collects money from umpteen investors who share  common investment goal.

There are various mutual funds which are crafted according to different investment objectives and risk profiles of the investors.

1. Equity funds – These invest primarily in stocks. Equity funds usually focus on sectors like technology, healthcare, etc.
2. Bonds – Invest in bonds issues by the government, municipalities and corporations.
3. Index funds – Index funds general have lower fees and try to show the returns of the index they track.
4. Money market funds – Money market funds invest in short term, high-quality investments such as commercial paper and treasury bill.
5. Sector Funds – They make investments in a specific sector of economy such as healthcare, technology, hospitality, etc.
6. Alternative investment funds – These funds invest in non-traditional assets such as commodities, real estate, etc.
7. Life cycle funds – These funds start with a mix of investments which gradually shift towards more conservative holdings.

Mutual funds offer these advantages to its investors.

Advantages of mutual funds –

1. Accessibility – Mutual funds play a major role in making various funds accessible to the investors which would usually not be easily accessible to individual investors, due to their complexity and expensiveness.
2. Diversification of stocks – Mutual funds pool money from various investors to invest in diverse portfolios of stocks and funds.
3. Professional management – Mutual funds are managed by experienced fund managers who make investment decisions based on their profound research, which ultimately helps to fetch better investment returns.
4. Liquidity of funds- Most of the mutual funds allow investors to redeem their shares, providing liquidity that allows the investors to access their money as and when required.
5. Options – Mutual funds come in various types and styles that give the investors the option to choose funds according to their investment goals.
6. Reinvestment – Many mutual funds offer options for dividend reinvestment where divided and capital gains are automatically reinvested.

Every coin has two sides, likewise mutual funds too have some disadvantages-

Disadvantages of mutual funds-

1. Expenses and fees – Mutual funds ask fur expenses and fees like management fees and operation expenses. The fund managers may make poor investment decisions or not perform well if they are not paid well.
2. Lack of control – In mutual funds, the investors are completely dependent on the fund managers regarding asset location, security selection, timing of trade, etc.
3. Over diversification – While we counted diversification as an advantage, over diversification within a portfolio could lead to lower returns.
4. Tax inefficiency – Mutual funds can be tax inefficient due to capital gains , this can result in tax liabilities for investors.
5. Market risk – We constantly get to hear the fact that mutual funds are subject to market fluctuations and risks in the securities they hold.
6. Complexity – Mutual funds could be complex, making it challenging for the investors to understand the nature of funds.