Advantages of Mutual Funds

1. Liquidity – Relatively. One of the advantages of mutual funds is that they are relatively liquid, i.e., you can withdraw your capital and interest from mutual funds quite easily. The caveat is the lock-in period, which might be applicable to some mutual funds. Once your lock-in period is over, however, you are free to sell your mutual fund units when the prices are high and can make you a decent profit. But keep an eye out for any liquidation fees, a.k.a., the exit load!
   
   
2. Diversification – Diversification is what lends some level of security – in the form of risk mitigation – to your investments. The ability to create a diverse financial portfolio is an important advantage of mutual fund investing, especially for young investors. You can choose to invest in debt, equity, or hybrid mutual funds, each with a different risk profile, and investment objective, to invest your money in a way that its growth will align with your financial goals. So, when one asset class might not be performing, another one can potentially compensate for it. The gist is this – several eggs require several baskets!
   
   
3. Management – The evolution of mutual fund management, and the role of fund managers is unmatched! If you’re a young investor, you can obviously use the guidance and expertise of someone better acquainted with the securities market. But whatever your investor level might be, you can’t deny that the availability of expert management is one of the top advantages of mutual funds, hands down!
   
   
4. Wallet-Friendly – You don’t have to be loaded to start investing in mutual funds. You can literally start with as little as ₹1 in mutual funds, using apps like Deciml. Our favorite part of this advantage of mutual funds is that it completely rules out the scope of any excuse that young (or nervous!) investors might have to not start investing now! 
   
   
5. SIPs – We can’t talk about wallet-friendliness without thanking the investment gods for Systematic Investment Plans (SIPs). Why invest in lump sums when you can invest in smaller increments and use the power of rupee cost averaging to maximize your gains? (Here’s how this works!) SIPs also offer a unique advantage in mutual fund investing, as it helps newbie investors develop the investing habit – which, as you well know, is an absolute must for wealth creation!
   
   
6. Tax-Efficiency – This is the one advantage of mutual funds that always makes young investors smile – especially if you’ve just started earning, and by extension, paying taxes! There are mutual funds that are called Equity Linked Saving Scheme (ELSS) funds, which qualify the investor for tax deductions of up to ₹1.5 lakhs under Section 80C of the Income Tax Act of India. This quality of mutual funds can be helpful for young investors to shoot two birds with one stone – tax-saving, and wealth creation.
   
   
7. Automation – The last, and possibly one of the most useful advantages of mutual funds in India is that this kind of investing can be completely automated. Whether you are using SIPs, or micro-investing in mutual funds through apps like Deciml – you can use auto-pay to automate your investments, so they require no intervention from your end. The investment is simply orchestrated on your behalf, at a time interval mandated by you. Talk about ease of investing!

We know these advantages are super appealing! And honestly, they are super easy to leverage. But, the key to unlocking the full potential of all these advantages of mutual funds lies in investing regularly, and staying invested for as long as you possibly can. 

The monetary benefits of mutual funds rely on compounding interest. And you already know that for compounding interest to work in wonders, you need to invest for longer periods of time.

Disadvantages Speed Bumps of Mutual Funds

(Scroll back up and re-read the disclaimer!) 

The few points we will talk about here are not disadvantages of mutual fund investing per se, but rather just hiccups that you need to know about, so you can work around them –

1. Exit Load – This is one of the main reasons why mutual fund companies state, “Please read the offer document carefully before investing.” Exit loads can be an unforeseen, added expense. But now that you know to watch out for it – you’re all set!
   
   
2. Risk Factor – No investment is risk-free. And unfortunately, nobody can accurately time the market. So, naturally, mutual funds do have some risk associated with them. But you can mitigate this risk by diversifying, opting for funds that offer relatively stable returns, and staying invested for a long time to give your investments the chance to balance out any losses.
   
   
3. Costs – Relying on a fund manager means incurring the cost of hiring one. You see how this is also just a small price rather than a flat-out disadvantage, right? Because now you know to account for these costs when planning your budget! Problem solved.

We want to remind you that none of these should deter you from investing and exploring the various advantages of mutual funds. We cannot stress this enough! But, as an investor, it is your responsibility to find out absolutely everything you can about a mutual fund before investing in it. 

Don’t worry, it’s nothing a little bit of due diligence can’t accomplish! Get Googling!

FAQs

• What are the advantages of investing in mutual funds?

There are many advantages of investing in mutual funds in India, including liquidity, diversification, management, automation, cost-efficiency, and SIP setup.

• Do all mutual funds have exit loads?

Some mutual funds have exit loads, and some don’t. You should inquire about the same before investing.

• Are mutual funds tax-efficient?

There are mutual funds that are called Equity Linked Saving Scheme (ELSS) funds, which qualify the investor for tax deductions of up to ₹1.5 lakhs under Section 80C of the Income Tax Act of India.