Understanding the pros and cons of investing in Mutual Funds

An average investor today is more aware of the basics of MF investments such as diversifying their portfolio to garner the maximum returns.

Apr 27, 2017 06:04 IST India Infoline News Service

Mutual Funds have become increasingly popular among a vast majority of investors. An average investor today is more aware of the basics of MF investments such as diversifying their portfolio to garner the maximum returns.  Here are a fe pros and cons of Mutual Fund investments:
 
Pros of investing in Mutual Funds
 
Professional portfolio management
For an investor, one of the biggest advantages of investing in Mutual Funds is that it gives you an exposure to stock market without having to pick a particular stock yourself. You have the option of hiring experienced industry professionals who have expertise in this field. A portfolio manager would constantly manage your portfolio in a way which will help you generate maximum return on your investments.
 
Diversification
Mutual Funds are inherently about investing in securities across various asset classes like bonds, commodities or cash in a way that naturally diversifies your investment portfolio. This move helps the most in cushioning losses in a particular asset class. If one sector is not performing well, there is a high probability of other sectors compensating for the loss.
 
Affordable
Investing in Mutual Funds is very affordable as an individual can invest as low as Rs. 500 every month in a Mutual Fund. Also, there is no upper limit on the amount of money that can be invested. So, even a small investor can participate in the market by investing in Mutual Funds.
 
Liquidity
All it takes to exit from a Mutual Fund is one instruction to your broker/agent to sell it. The funds come back to your account in 48 hours.
 
Cons of Investing in Mutual Fund
 
Fees & Expenses
Mutual Funds charge annual fees to their clients known as expense ratio irrespective of the fund’s performance. This can be defined as the cost of doing business. As an investor, you should also note that if you choose to redeem the investment before a particular period of time, there is an exit load on mutual fund schemes.
 
Lock-in Clause
While investing in MFs, you should be careful that there are two types of Mutual fund schemes  – Open-ended schemes wherein one can enter and exit any time and the other, close-ended scheme, which comes with a lock-in period of 3-5 years.
 
If an investor wishes to redeem the investment before the lock-in period, he needs to pay a certain amount as exit load. It is always advisable to consult a financial advisor and understand all the clauses before investing in mutual funds.

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