Planning to invest in Mutual Funds? Know these advantages and risks

Mutual fund has become a popular investment choice as it offers multiple options for investment across equity shares, corporate bonds, government securities, money market instruments, etc at a relatively low cost. 

If you are new to mutual fund space, and want to know the advantages and risks associated with mutual funds, here are the some of the important pointers provided by the Association of Mutual Funds in India (AMFI). 

Advantages of investing in mutual funds 

Professional Management: Investors may not have the time or the required knowledge and resources to conduct their research and purchase individual stocks or bonds. Whereas mutual funds are managed by professional fund managers and they continuously monitor investments and rebalance the portfolio accordingly to meet the scheme’s objectives.  

Risk Diversification: Buying shares in a mutual fund is an easy way to diversify your investments across many securities and asset categories such as equity, debt and gold, which helps in spreading the risk. With diversification, the risk associated with one asset class is countered by the others.  

Affordability & Convenience:  For many investors, it could be more costly to directly purchase all of the individual securities held by a single mutual fund. By contrast, the minimum initial investments for most mutual funds are more affordable. 

Liquidity: One can easily liquidate mutual fund schemes to meet financial emergencies. However, investors should note that this facility is available with only open-ended mutual funds as close-ended mutual fund schemes can be redeemed only on maturity. Likewise, units of ELSS have a 3-year lock-in period and can be liquidated only thereafter. 

Low Cost: An important advantage of mutual funds is their low cost. Due to huge economies of scale, mutual funds schemes have a low expense ratio, which has been specified under Regulation 52 of SEBI Mutual Fund Regulations, 1996. 

Tax Benefits: Investment in Equity Linked Savings Scheme (ELSS) up to Rs 1,50,000 qualifies for tax benefit under section 80C of the Income Tax Act, 1961. Mutual Fund investments when held for a longer term are tax efficient. 

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However, like any other investment fund, there are some risk factors associated with mutual funds. 

• Mutual fund schemes are not guaranteed or assured return products. 
• Investment in mutual fund units involves investment risks such as trading volumes, settlement risk, liquidity risk, default risk including the possible loss of principal. 
• As the price / value / interest rates of the securities in which the Scheme invests fluctuates, the value of investment in a mutual fund Scheme may go up or down. 
• In addition to the factors that affect the value of individual investments in the Scheme, the net asset value (NAV) of the Scheme may fluctuate with movements in the broader equity and bond markets.  
• The NAV may be influenced by factors affecting capital and money markets in general like changes in interest rates, currency exchange rates, changes in Government policies, taxation, political, economic or other developments. 

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)