Profile
Settings
Refer your friends
Sign out
When it comes to saving and investing, you have a range of options, including mutual funds, fixed deposits, stocks, and bonds. However, of all the investing options accessible, mutual funds are considered suitable for individuals with a wide range of financial perspectives and objectives.
A mutual fund scheme is overseen by a fund manager, who may be assisted by a team of specialists in some situations. The Securities and Exchange Board of India (SEBI) regulates mutual funds. Several different types of mutual funds are available in India, including equity, debt, balanced, tax saving, and fixed maturity plans. Below is a list of disadvantages of mutual funds.
Mutual funds
A mutual fund is a corporation that collects money from many investors and puts money into stocks, short-term loans, and bonds. The mutual fund portfolio comprises all of the fund’s holdings. Investors purchase mutual funds. Each share represents an investor’s portion of the fund’s ownership and revenue.
The following are the most general mutual fund categories:
Equity funds: Funds that invest in stocks only and other equity-related products are known as equity funds.
Debt funds: Debt funds are funds that only invest in fixed-income securities.
Market funds: Funds that invest in short-term money market products are known as money market funds.
Hybrid funds: Hybrid funds invest in both debt and equities to achieve a balanced portfolio.
The disadvantage of mutual funds in India
While you should have no reservations about investing in mutual funds, there are a few things you should know before getting started. A few points to consider before investing –
Lock-in Period:
Some mutual fund investments, such as ELSS, have a three-year lock-in term, which means you won’t be able to redeem your money until that period expires. On the other hand, other funds want you to stay invested for a year. If you still want to leave a fund before the lock-in period, you’ll have to pay an Exit Load fee.
Fluctuating Returns:
As mutual funds can not promise fixed returns, you should always be prepared for the worst-case scenario, which includes depreciation in the value of your mutual fund. In other words, mutual funds are subject to a wide range of price changes. Professional fund management by a team of specialists does not protect you from poor fund performance.
No Control over the funds:
Fund managers oversee all forms of mutual funds. A team of analysts may assist the fund management in several circumstances. As a result, you have no influence over your money as an investor. Your fund manager makes all significant decisions regarding your fund. You can, however, look at certain essential parameters like disclosure norms, corpus, and so on.
CAGR:
A mutual fund’s performance about the compounded annualized growth rate (CAGR) does not offer investors enough information about the level of risk a mutual fund faces or the investment procedure involved. As a result, it is only one of the metrics used to assess a fund’s performance, and it is far from comprehensive.
Fund Evaluation:
For many investors, conducting comprehensive research and evaluating the worth of several funds might be tough. The net asset value (NAV) of a mutual fund tells investors how much the fund’s portfolio is worth. However, investors must examine a variety of indicators, such as the Sharpe ratio and standard deviation, among others, to determine how one fund performed compared to another, which can be time-consuming.
Unpredictable tax outcomes
Investors who invest in mutual funds do not have to bother about constantly buying and selling shares. As a result, the average investor will have to put in less effort. Investors may get year-end dividends if a mutual fund sells securities from its portfolio. These are taxable investment distributions.
Depending on how long an investment is held, these distributions are taxed at ordinary income or capital gains rates, which means you may end up with a higher-than-expected tax bill at the end of the year. Those who live in high-tax states should pay extra attention to this because it can chip away at their gains.
Conclusion
Individuals can invest in a professionally managed investment portfolio with built-in diversification through the top mutual funds. This is advantageous since investors do not have to worry about purchasing and selling shares. There are several disadvantages of mutual funds in India. Some mutual funds have hefty fees and commissions and can only be traded once daily. However, by carefully selecting mutual funds and seeking low-cost solutions, you can avoid or at least alleviate the worst of these problems.
It’s best to hear both sides of a story since it provides you with a better idea and allows you to make better decisions, which this article does for you.
