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Advantages and Disadvantages of Mutual Funds in India

12 January 2022
5 minutes

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. 

Advantages of Mutual Funds in India

The advantages of mutual funds in India have been enumerated below: 

  • Mutual Funds are Managed by Asset Managers Professionally

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 Risk Gets Reduced through Diversification

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.

  • Liquidity

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 are Low Cost

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.

  • Mutual Funds also Offer Tax Benefits

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.

  • Mutual Funds are Affordable

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.

  • Safe and Transparent

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.

Disadvantages of Mutual Funds in India

There are some disadvantages to mutual funds, and we have discussed some of them below:

  • Costs

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.

  • Diversification of Funds

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.

  • Lock-in Period

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.

  • Fluctuating Returns

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.

Key Takeaways

  1. You can invest in mutual funds with as little as Rs. 500 per month.
  2. Money can be invested every month or week or daily via systematic investment plans (SIP) as per your budget.
  3. The investment manager manages the portfolio and makes investment decisions on your behalf.
  4. Mutual funds up to Rs. 1.5 lakhs are tax exempted as per Section 80C of the Income Tax Act.
  5. If you sell your investments within the stipulated time, exit loads are applicable.
  6. Mutual funds do not guarantee returns as they depend entirely on the market.
  7. Some mutual funds have a lock-in period of 3 years, and, therefore, money cannot be withdrawn before the stipulated time.

 FAQs

1) What are the different types of mutual funds in India?

A. There are four types of mutual funds in India:

  • Equity Funds: Here, the investment is made in stocks.
  • Money Market Funds: These are short-term debts.
  • Balanced or Hybrid Funds: These are stocks and bonds.
  • Fixed-Income Funds: Here, the investment is made in bonds.

2) Do you need a Bank Account to invest in mutual funds in India?

A. Yes, it is mandatory to have an account with any bank, and your PAN, KYC, and Aadhar details are necessary.

3) Are mutual funds easily accessible?

A. The mutual funds in India are easily accessible as you can start investing and buy mutual funds from all over the world. The asset management companies (AMCs) distribute mutual funds through channels like:

  • Brokerage firms
  • Agents and banks
  • AMC’s themselves
  • Registrars like Karvy and CAMS
  • Online platforms for mutual fund investments

4) What is a Net Asset Value?

A. Net Asset Value (NAV) is the market value of a scheme’s assets minus its liabilities. The per-unit NAV is the scheme divided by the number of units outstanding on the Valuation Date.

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