Mutual fund investments- Pros and Cons

ByAmrina Alshaikh

Thinking of investing in mutual funds India? Agreed, mutual funds investment plans in India are natural choices for every investor willing to diversify his/her portfolio while earning returns that outstrip inflation over the long haul. However, there are still some advantages and disadvantages of investing in mutual funds.

Pros of investing in mutual funds India 

  • Liquidity Benefits- Until and unless you are choosing close-ended funds, it is comparatively easier to purchase and even exit any mutual fund plan. You can sell off your mutual fund units anytime you wish although you should note the pre-exit penalty or exit load and remember that transactions take place only once in a particular day post release of the NAV by the fund house.
  • Diversification- Mutual fund returns in India are historically superior to inflation, particularly if you choose the right kind of funds. Agreed, there is always a component of mutual funds risk in India although the fund manager will invest in multiple asset classes for spreading risks. Diversification ensures that whenever one asset is not performing, other assets will make up with better returns in order to avoid losses.
  • Professional Management- Mutual funds are mostly professionally managed by skilled and experienced managers. They take decisions on investing in either debt or equity while deciding on holding onto units and the duration for the same. Expense ratio should be carefully checked before choosing a plan. It should not exceed 1.05% of the AUM as per SEBI regulations. This will include the manger’s fee as well.
  • Bulk transactions- Whenever you purchase multiple units, processing fees and added charges will naturally come down.
  • Smaller denominations- When you invest in smaller denominations via systematic investment plans or SIPs, you will have exposure to the whole stock. This will lower average transaction costs greatly. Rupee cost averaging benefits are available with regular quarterly or monthly investments.
  • Cost effectiveness- There are zero-load funds with smaller expense ratios. You can compare these ratios and choose funds which come within your budget.
  • Tax benefits- You can invest in tax saving funds in India, namely ELSS which gives up to Rs. 1.5 lakh deductions under Section 80C. 10% tax will apply on long term capital gains or LTCG for returns exceeding Rs. 1 lakh after a year, they have given returns consistently higher than other instruments for saving taxes.

Some other benefits include automated payments for SIPs or lump sum investments along with a quick and hassle-free procedure. You can start investing with an amount as low as Rs. 500 each month while there is overall safety since regulatory bodies like AMFI and SEBI have guidelines that fund houses have to mandatorily follow.

Cons of investing in mutual funds India

Of course, mutual fund performance in India is never guaranteed. There will always be market risks and risks arising from potential losses and fluctuations in NAV or value. This is the biggest disadvantage in a manner of speaking. Some other aspects include the following:

  • Fund management charges and added costs.
  • Lock-in periods for several funds.
  • Dilution of the portfolio is a risk upon diversification.

All in all, mutual funds India are good investment options for building long-term wealth.