Any method of generating savings or an investment plan has its own benefits. It can be either for the short term or the long term. Investors in India usually want to invest in mutual funds because of their risk management.
In this article, we will learn about the advantages and disadvantages of mutual funds in India.
The advantages of mutual funds in India have been enumerated below:
The fund house appoints asset managers, also known as fund managers, to manage the mutual funds in India. These managers understand how to identify the best stocks that can generate maximum profits.
The money in mutual funds is invested in multiple sector stocks. Hence, the loss incurred in one asset class is managed by profit made in another sector or asset class.
One advantage of mutual funds that is often overlooked is liquidity. Mutual funds can be easily bought and sold in the short term during market hours and, hence, are considered highly liquid. Some funds like ELSS are an exception as they have a specified lock-in period and cannot be easily liquidated.
Mutual funds in India also have low costs. The fund management fees charged by mutual funds are 1%-2.50%. Mutual funds, though low in cost, provide you with higher returns. Returns are calculated based on the amount grown within the given time frame.
Investing in mutual funds in India via the equity market can offer you tax benefits. The investments made in ELSS are exempted under Section 80C of the Income Tax Act, up to Rs. 1.5 lakhs.
You can start investing in mutual funds from a minimal amount, such as Rs. 500. As per your budget, you can opt for SIP or lumpsum investment.
Investments in mutual funds are very transparent. All mutual fund companies come under the purview of SEBI and they need to make necessary disclosures.
Value of stocks, the historical performance of the fund, fund manager’s qualification, and track records are known. The NAV (net asset value) of the fund is updated every day. On any mutual fund page like Groww – you can look at the details about the mutual fund.
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There are some disadvantages to mutual funds, and we have discussed some of them below:
Although costs were an advantage in the section above, they are equally disadvantageous in mutual funds. Some mutual funds in India have high costs associated with them. If you exit before the stipulated time, you will have to incur exit charges. You cannot withdraw the amount before the given time frame.
Though diversification of funds saves you from incurring a loss, it can also be a disadvantage as it can prevent you from gaining significant profits. Some sectors give huge profits, so not investing much in them can be a big loss for you.
The lock-in period can sometimes prove to be a significant disadvantage as you cannot withdraw your money before the specified time. Hence, in case of emergencies, you cannot liquidate your invested amount.
Mutual fund returns are not guaranteed as they keep fluctuating according to the market conditions. Hence, investors must be aware of the risk profile of the fund before investing.
Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.