Merits and Demerits of Investing in Mutual Funds

Mutual funds have their own advantages and disadvantages. It depends on you how careful you are while investing your hard-earned money. With proper knowledge and research, your money will be safe. This article will light on the pros and cons of mutual funds, which will help you understand what you should do to secure investments.  

Characteristics Of Mutual Funds  

There are some salient features of mutual funds that are not provided by any other type of investment. Some of these are –  

  • Mutual fund shares are more affordable than individual equity investments because the portfolio is distributed to investors in different units. 
  • A mutual fund’s diversity is well-known. It invests in various securities and instruments across various businesses and sectors. Diversification lowers the risk in the portfolio. 
  • A mutual fund is a liquid investment that can be easily sold anytime. With certain withdrawal costs, you can sell the shares at the current net asset value (NAV). 

Merits of Mutual Funds

Mutual funds are known as safe investments. There are many reasons why investors like to invest in mutual funds. These are –  

  • Risk Reduction (Safety) – With the help of diversification, that means combining many different investments in one portfolio. Investing in different securities can reduce the risk of mutual fund failure.  
  • Convenience And Fair Price – Mutual funds are simple to purchase and manage. The mutual fund often only needs small minimum investments. Also, mutual funds are only traded once daily at closing Net Asset Value (NAV). By doing this, you can avoid daily price variations.
  • Advanced Portfolio Management – A management fee is included in your mutual fund when you purchase one. With this fee, you pay for a qualified portfolio manager who will purchase and sells stocks, bonds, and other securities for you. You only have to pay small fees for expert assistance in managing your investment portfolio. 
  • Reinvesting Dividends – As dividends and other types of interest income are declared for the fund, they can be used to buy more mutual fund shares. It will allow your investment to increase. 

Downside Of Mutual Funds 

Some of the demerits of mutual funds are mentioned below:

  • Ineffective Taxation – Whether you like it or not, investors are forced to accept capital gains distributions from mutual funds. Investors often get distributions from the fund that are an unavoidable tax event because of the turnover, redemptions, gains, and losses in security holdings during the year. 
  • High Expense Ratios And Sales Charges – Sales charges and cost ratios for mutual funds can go out of control if you’re not paying attention to them. When investing in funds with expense ratios over 1.50%, which are viewed as being at the higher cost end. 
  • Poorly Executed Trades – You will receive the same closing price net asset value for your purchase or sale on the mutual fund if you execute your deal before the cutoff time for same-day net asset value. 

To Sum Up 

Every investment comes with its own merits and demerits. Mutual funds are relatively safe compared to any other investments. However, it depends on your awareness of your investments, so you can take your money out before it goes into loss. With good research and knowledge, you can always keep your money safe and gain some profit from it.  To trade hassle-free in mutual funds, download the Shoonya App, which offers trading across multiple assets, including bonds, shares, Futures and Options, Mutual Funds, and commodities and charges no hidden cost via its strict zero-commission policy.