Mutual Funds

Pros and Cons of Mutual Funds Investment

Pros and Cons of Mutual Funds Investment

Why Mutual funds? When investing your valuable money in any market or financial instrument, it is important to research carefully. Every person wants to earn the best possible return on his/her investment with the lowest risk so it is important to research properly about all the available options and their potential.

Mutual funds are one of the best options to invest your money because mutual funds are very safe and stable so chances of loss are very little. New investors with very basic knowledge about the market can also invest in mutual funds because your money in mutual fund schemes is always managed by professional fund managers.

Pros of mutual funds

Diversified portfolio – Diversification of your investment is one of the main advantages over other investment options and diversified portfolio is the key to earn the best possible revenue on your investment with the lowest risks.

Let’s understand the diversification of investment in simple language. For example, a person invests its money in share market and he makes a good profit but if the share market starts moving in a downward trend or in unpredicted trend than surely a share market investor will suffer loss.

In the share market, your investment portfolio is limited up to share market and share market related financial instruments so if share market moves in positive trend than it gives good returns but if share market moves in unpredicted trend than investor suffer loss.

But in mutual funds, things are pretty different and diversified, in mutual funds your money is invested in multiple markets such as bonds, commodities, fixed deposits and share market if one market decline than there are chances you can still earn good profit and can recover the loss from other markets. Diversification of your investment portfolio offers you the maximum possible profit from every market with the lowest possible risks.

Professional management of portfolio – Investing your hard-earned and valuable money at the right place is not an easy task it requires a lot of research and study to analyze the market so you can make good returns from your investment.

Once you make the decision to invest your money in any market such as a commodity, share market or gold you have to do a lot of research and study to pick the right option which obviously requires a lot of skills and time.

In mutual funds you don’t have to research and analyze everything by yourself, you can start investing in mutual funds with very basic information without having any financial loss because your investment portfolio is always managed and monitored by professional fund managers. Usually, professional fund managers have years of experience in the market so they can pick the right investment strategy for you.

Once you invest in mutual funds you can keep yourself relaxed because fund managers are always monitoring your portfolio so you don’t need to get regular updates about the situation of the market. If there is any change required in the portfolio than experts will notify you and they will make necessary changes to your portfolio.

Liquidity – Liquidity is one of the major factors in any investment, in financial term liquidity refers to the process of converting financial instruments or assets into cash.

Let’s understand it with a simple example, assume you had invested your money in real estate and you had bought a plot as an investment, if you won’t sell it to get cash money, the process of selling might take few months or year to find suitable customer so you can easily figure out that liquidity process of converting assets into cash is here pretty long.

In mutual funds liquidity process is pretty impressive, you can sell or quit your mutual fund assets very quickly and funds can be available in your bank account within 48 hours.

You can start with a small amount – In any type of investment, money is a major factor if you invest your money in real estate or stock market than you need a large amount of money to start your investment. In mutual funds, you can your investment with a small amount of money like 500 rupees and there is no upper limit of the investment amount. This makes mutual funds an ideal investment option for low to medium-income earners.

Tax benefits – Mutual funds are most tax-efficient as compare to other investment options. Tax on long term equity mutual fund is zero that means if you sell your equity mutual fund after one year from the purchase than you don’t have to pay tax.

Low-risk investment – Mutual fund investments are low volatile as compare to other markets which mean mutual fund investments offer you stable and secure returns on your investment. Mutual funds are ideal for those investors who have low-risk tolerance and want to earn risk-free returns.

Cons of mutual funds

Lock-in period – There are two types of mutual fund schemes open-ended schemes and close-ended schemes. In open-ended schemes you can enter and exit anytime without any restrictions but if you invest in close-ended schemes than you can only exit after completing maturity period of your investment if your exits from your investment before maturity period than you have to pay extra charges as exit load.

Limited growth – Mutual funds are usually very low volatile and has a diversified portfolio. A diversified portfolio reduces the risk of loss but at the same time, it restricts the chances of getting high returns on your investment. If you invest in a high volatile market such as share market it enables you to earn high returns on your investment meanwhile in mutual funds schemes volatility is low so return on your is limited.

Conclusion 

Every investment schemes have low to high risk, it is always recommended to get the basic knowledge about financial markets before investment. Low-risk investment schemes are ideal for those who want to earn a safe but limited return on its investment while high-risk schemes are ideal for those investors who want to invest in high volatile schemes to earn bigger returns and can tolerate high risks.

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