Advantages and Disadvantages of Mutual Funds

Vinish Parikh February 3, 2013

Mutual funds are those instruments of investments which pool the money from many investors and then invest that money into financial markets like equities, commodities, debt, overseas market, currencies etc… so as to generate good returns for the investors. Given below are the advantages and disadvantages of mutual funds –

Advantages of Mutual Funds

  1. It is best suited for those people who do not have much financial acumen and expertise because if you enter into equity markets on your own without proper knowledge than it can lead huge losses and therefore first time investors are better off investing through mutual funds.
  2. They are managed by professionals who have been into this business for past many years and hence you get the services of professionals without much cost as the entry and exit expense are not much when you compare it with returns these funds generate over a period of time.
  3. They are highly liquid and one can buy and sell it whenever one wants and hence it provides a great deal of flexibility to the investors.
  4. Another advantage is that they do not require high investment or in other words you do not have to be a millionaire to invest into mutual funds and even people who fall under middle income or lower income group can invest into mutual funds.

Disadvantages of Mutual Funds

  1. Biggest disadvantage of mutual funds is that you do not have any control over your investments because once you invest money into the mutual fund it is not you who decides which industry or stock to buy but it is the fund manager who decides it.
  2. Another disadvantage is that there is element of personal bias because when to enter or exit a particular stock or group of stocks is decided by the fund manager and sometimes such decisions can be taken for personal ego or gain rather than pure financial acumen.
  3. There is no guarantee that you will earn returns which are equivalent to that of market returns as history is filled with examples where the market has given great returns in a year but a mutual fund has generated ordinary or no return in a year for the investors.

As one can from the above that similar to other investments mutual fund too has many advantages as well as disadvantages and hence one should first carefully look at above points and then take the decision whether to invest or not.