What are the advantages and disadvantages of investing in a mutual fund?

Mutual funds are collective investments with the benefit professional management and natural diversification built into them. Mutual funds bring the following distinct advantages to investors.

· Mutual funds bring professional management to the table. With access to information and top-end analysis and supported by the services of fund managers, traders and analysts, mutual funds transmit the benefits of scientific investment to investors at a very nominal cost.

· Mutual funds bring the benefit of diversification to your investments. For example, as an individual investor you will have limitations on the amount you can invest and the number of stocks you can buy. Mutual funds overcome the problem. By creating a centralized portfolio of quality equities, an equity fund gives an investor the benefit of diversification. This diversification across assets gives the investor the benefit of reduced risk in the market.

· Mutual funds help you to build enormous wealth over the long term. In fact, the power of compounding works best with respect to equity mutual funds. Equity mutual funds are for the long term if you want to generate wealth and it can actually be a worry-free method of generating wealth over the long term.

· Transparency is the biggest advantage with a mutual fund. For example, when you invest in a corporate bond or in a bank FD, you exactly do not know what the company or bank is doing with your money. In case of an equity mutual fund or a debt mutual fund, you have complete details of how every penny collected by the fund is invested, what is the actual worth of your fund each day and a monthly factsheet with provides a lot of analytical risk and return metrics.

· Mutual funds are liquid. This is unlike your holdings in a company bond, company fixed deposit or even a bank deposit. You can liquidate mutual funds are short notice. While you get your equity funds money in T+2 days, your money in case of debt funds and money market funds will be credited on T+1 day itself.

· Mutual funds are regulated by SEBI and that gives an additional level of comfort for the investor. Additionally, there is a board of trustees consisting of eminent people which ensures that interests of the mutual fund investors are adequately protected. Transparency is an added advantage for mutual funds. The trustees of the fund actually act on behalf of the unit holders of the fund and are also regulated by SEBI.

· From a financial planning perspective, mutual funds offer solutions for every need. Consider the following. Equity funds meet the need for growth while debt funds meet the need for stability with additional returns. Liquid funds meet the need for liquidity while ELSS funds met the need for tax planning. There are dedicated mutual funds which are focused on specific needs like retirement, children’s education etc. This makes the mutual fund product extremely flexible and amenable.

However, mutual funds have challenges too

Having understood the advantages of a mutual fund, it is also necessary to understand the limitations of investing in a mutual fund…

· All mutual funds have an impact cost. Be it equity funds or debt funds, there is an impact cost when you buy and sell equity or debt in the market. This impact cost can have a meaningful impact on investor returns over the longer term.

· Mutual funds are subject to market risk. Equity funds are vulnerable to the vagaries of the equity market. Debt funds are vulnerable to the ups and downs of interest rates and liquidity in the market.

· Equity funds are all about stock selection. When fund managers select stocks, they may pick stocks that add to the concentration risk. They may also be inclined to chase mid-caps and small caps in the quest of returns. These can impact fund performance.

· From an investor point of view there is a problem of choice. With over 35 AMCs and over 1400 schemes with a massive number of plans and sub-plans, the investor has a major problem of choice.

· Remember, fund management has a cost in the form of fund management fees, custodial charges, transaction charges, legal fees, administration expenses etc. All these costs get debited to the fund and eventually reduce the NAV of the fund and therefore the investor’s effective returns.

Advantages of investing in Mutual Fund

1. Diversification with small investment reduces risk

2. Exposure to all companies in portfolio with Low Investment

3. Low Fund Management Fees - Service of Expert Fund Manager at lowest cost

4. No fix maturity eliminates reinvestment risk

5. Funds can be invested and managed in different categories depending on Investors Financial Goals

6. Flexibility of Investment amount from Rs. 500 per month to no upper limit

Disadvantage of Investing in Mutual Fund

1. Fund Management Fees / Cost of Managing Funds deducted irrespective of profit / loss to investor

2. No direct holding of any shares/ownership of any company

Advantages of Mutual Funds

• Professional management. Mutual Fund managers are professionally trained and experienced, constantly watching and managing their fund. Remember, though: the guy on the other side is not Warren Buffett. He might come close, but he’s not Warren.
• Instant diversification. Since one of the primary rules of investment is to diversify portfolios, a mutual fund can be a simple and successful way to accomplish this goal. With one investment, you will own shares of stock in many corporations. A mutual fund portfolio combines a variety of stocks, bonds, commodities and cash, mutual funds are, by nature, diversified. If one stock or asset goes down, there will be others that compensate for it. This just means that the potential for losses is spread out conservatively.
• Liquidity. If you ever want to get out of a mutual fund, all you have to do is instruct your broker or financial advisor. They can sell it immediately. Normally, the funds take a day to come back into your account, but that’s not so bad. Comparatively, individual stocks would take much longer to liquidate.
• Match your style. You can find a mutual fund that matches almost exactly what you are looking for from an investment. This could be related to both your risk tolerance and your investment horizon.

Disadvantages of Mutual Funds

• Management Fees. Mutual fund companies have to pay salaries and marketing expenses and they always get paid FIRST before the investors/owners get paid! Management fees are one of the key metrics to watch out for as an investor because they can quickly and devilishly eat into your profits over time. Do higher management fees correlate to higher returns and better performance? As it turns out, the answer is NO. In fact, many studies have been done that show higher fees generally correlate to lower performance.
• Locked in Clause. There are two different mutual fund structures – one allows you to go in and out at any time. The other one is locked in for 5-7 years. With this one, if you try to take your money out earlier, you’ll get charged for it. Make sure to ask your financial advisor which type you are investing in.
• Wasted Cash. Because people occasionally want to withdraw their mutual funds, there must always be funds available – in cash – for payouts. When money’s in cash, it’s not collecting interest. Since this comes from a portion of the investment funds, it means it doesn’t collect any interest for you. That amount of cash is better off sitting in your bank account.

• Mutual Fund Charges.

  Mutual funds charge fees when you redeem your money. There are also “operating expense” fees. This is a percentage of what it costs to run the fund. Let’s say you invested $10,000, and the operating fees are 2%. This means that you are effectively paying $200 every year in operating charges.

Advantages you will get the best returns by investing

Disadvantages you will not get untill you're interested

MF is most powerful tools for income because systametic investment individual can not build

Therefore MF is helpful for huge income in future

Advantages for investors include advanced portfolio management, dividend reinvestment, risk reduction, convenience, and fair pricing. Disadvantages include high fees, tax inefficiency, poor trade execution, and the potential for management abuses.