Advantages and Disadvantages of Mutual Funds
Credit: North Loop
Advantages and Disadvantages of Mutual Funds
When you’re considering investing, a natural question may be why invest in mutual funds vs other forms of investments. In this post, we’ll show you some advantages and disadvantages of mutual funds.
Advantages of Mutual Funds
Reduce Risk through Diversification
Investing a well-diversified mutual fund portfolio ensures that you have reduced your risk and exposure, protecting your investments from shock events or downturns to specific companies or industries.
Liquidity
It is easy to withdraw your funds should you need your money back immediately. If you have invested in fixed deposits, it isn’t always as easy to withdraw if there is an emergency.
Easy to Invest
You can start investing with as little as Rs. 500. Mutual funds are easy to start investing in, setup SIPs or one-time investments, and easy to track their performance.
Cost
Relative to the returns, mutual funds aren’t very expensive. Many actively managed funds can charge much more than a mutual fund, while usually providing similar returns.
Tax Benefits
Mutual funds are considered a great investment from a tax perspective. First, ELSS tax savings funds provide you with a tax exemption of up to Rs. 1,50,000. And if you hold your investment in an equity mutual fund for more than one year, you only pay 10% on the capital gains (much lower than the income tax rate). If you’ve invested in a debt fund, long term gains start after three years, but have the added benefit of indexation to help reduce your tax liabilities!
You Can Start Small
You can start with an investment of just Rs. 500 in a mutual fund, and as you grow more comfortable with investing, keep increasing that amount.
Automate
You can set up a SIP at the frequency of your choice, link a bank account, and automate your regular investments! So you’ll consistently grow your portfolio, save for your goals, without having to do much work.
Flexibility
If you want to set up SIPs or invest once a year, you can do that with mutual funds. You can specify the frequency of your SIP, or set up a SWP (withdrawal plan) that withdraws money at a defined frequency. Mutual funds are an extremely flexible form of investment.
Investing a well-diversified mutual fund portfolio ensures that you have reduced your risk and exposure, protecting your investments from shock events or downturns to specific companies or industries.
Liquidity
It is easy to withdraw your funds should you need your money back immediately. If you have invested in fixed deposits, it isn’t always as easy to withdraw if there is an emergency.
Easy to Invest
You can start investing with as little as Rs. 500. Mutual funds are easy to start investing in, setup SIPs or one-time investments, and easy to track their performance.
Cost
Relative to the returns, mutual funds aren’t very expensive. Many actively managed funds can charge much more than a mutual fund, while usually providing similar returns.
Tax Benefits
Mutual funds are considered a great investment from a tax perspective. First, ELSS tax savings funds provide you with a tax exemption of up to Rs. 1,50,000. And if you hold your investment in an equity mutual fund for more than one year, you only pay 10% on the capital gains (much lower than the income tax rate). If you’ve invested in a debt fund, long term gains start after three years, but have the added benefit of indexation to help reduce your tax liabilities!
You Can Start Small
You can start with an investment of just Rs. 500 in a mutual fund, and as you grow more comfortable with investing, keep increasing that amount.
Automate
You can set up a SIP at the frequency of your choice, link a bank account, and automate your regular investments! So you’ll consistently grow your portfolio, save for your goals, without having to do much work.
Flexibility
If you want to set up SIPs or invest once a year, you can do that with mutual funds. You can specify the frequency of your SIP, or set up a SWP (withdrawal plan) that withdraws money at a defined frequency. Mutual funds are an extremely flexible form of investment.
Credit: North Loop
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Disadvantages of Mutual Funds
Cost
Investing in mutual funds isn’t free. There is a cost (expense ratio) to them, so always be mindful that there will be a small cost associated with investing in mutual funds. ETFs and other passive funds have lower costs than actively managed funds.
Opportunity Cost
As they say, ‘there is no such thing as a free lunch’. Through a diversified portfolio, you will reduce risk but also give up some returns. So you may see the Sensex soar by 30% but your portfolio only soars by 25%. At North Loop, we don’t see this as a disadvantage - you should care about meeting your financial goals, not beating the Sensex!
Investing in mutual funds isn’t free. There is a cost (expense ratio) to them, so always be mindful that there will be a small cost associated with investing in mutual funds. ETFs and other passive funds have lower costs than actively managed funds.
Opportunity Cost
As they say, ‘there is no such thing as a free lunch’. Through a diversified portfolio, you will reduce risk but also give up some returns. So you may see the Sensex soar by 30% but your portfolio only soars by 25%. At North Loop, we don’t see this as a disadvantage - you should care about meeting your financial goals, not beating the Sensex!
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This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended be advice. You must obtain professional advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax, investment or other professional advice from North Loop or its affiliates. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. All opinions expressed do not reflect the views of North Loop nor are endorsed by North Loop.
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