16.4 Mutual funds - why should you invest?

Hanumant Dhokle

Advantages of Mutual Funds

Diversification:
The best mutual funds design their portfolios in such a way that investment components will react differently to the same economic conditions. For example, economic conditions like a rise in interest rates may cause certain securities in a diversified portfolio to decrease in value whereas certain others to rise in value. Professional Management: Most mutual funds are managed by expert professionals.

Regulatory oversight:
MFs are subject to many government regulations that protects investors from fraud.

Liquidity:
It's easy to get your money out of a mutual fund.

Convenience:
You can usually buy mutual fund shares by mail, phone or over the internet.

Low cost:
Mutual fund expenses are often no more than 2.5 percent of your investment. 2.5% being the maximum expense ratio permissible by SEBI .

Flexibility  :
Mutual funds offer a variety of plans and schemes.

Tax benefits:
Investing in certain mutual funds will give you income tax exemption.

Well regulated:
Mutual funds in India are regulated and monitored by the Securities and Exchange Board of India (SEBI).

Disadvantages of Mutual Fund

Mutual funds are good investment vehicles to navigate the complex and unpredictable world of investments. However, even mutual funds have some inherent drawbacks. Understand these before you commit your money to a mutual fund.

No assured returns and no protection of capital:
If you are planning to go with a mutual fund, this must be your mantra: mutual funds do not offer assured returns and carry risk. For instance, unlike bank deposits, your investment in a mutual fund can fall in value.

Taxes:
During a typical year, most actively managed mutual funds sell anywhere from 20 to 70 percent of the securities in their portfolios. If your fund makes a profit on its sales, you will pay taxes on the income you receive.

Risks:
Professional fund managers are not always infallible.

Inefficiency of Cash Reserves:
Mutual funds usually maintain large cash reserves as protection against a large number of simultaneous withdrawals. Although this provides investors with liquidity, it means that some of the fund’s money is invested in cash instead of assets, which tends to lower the investor’s potential return.

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