What are the Pros and Cons of investing in Mutual Funds?

Mutual funds are considered to be the most popular investment vehicle. Most of the investors invest in mutual funds in order to diversify their holdings and earn maximum return. While it is true that mutual funds provide diversification, it is also important to determine the pros and cons of mutual funds.

Pros of Investing in Mutual Funds

Professional Portfolio Management

An individual’s portfolio is managed by experienced industry professionals who have expertise in this field. They constantly manage your portfolio in a way which will help you generate maximum return on your investments.

Diversification

Mutual funds can invest in securities across various asset classes like binds, commodities or cash. This helps in portfolio diversification. If one sector is not performing well, there is a high probability of other sectors compensating for the loss.

Affordable

Investing in mutual funds is very affordable as an individual can invest as low as Rs. 500 every month in a mutual fund. There is no upper limit on the amount of money that can be invested. So, even a small investor can participate in the market by investing in mutual funds.

Liquidity

All it takes to exit from a mutual fund is one instruction to your broker/agent to sell it. The funds come back to your account in 48 hours.

Cons of Investing in Mutual Fund

Fees & Expenses

Mutual funds charge annual fees to their clients known as expense ratio irrespective of the fund’s performance. This can be defined as the cost of doing business. Moreover, there is an exit load on mutual fund schemes, if the investor wishes to redeem the investment before a particular period of time.

Lock-in Clause

There are two types of mutual fund schemes - one which allows you to enter and exit any time, which is know as open-ended scheme and the other scheme comes with a lock-in period of 3-5 years, which is a closed-ended scheme. If an investor wishes to redeem the investment before the lock-in period, he needs to pay a certain amount as exit load.

It is always advisable to consult a financial advisor and understand all the clauses before investing in mutual funds.