Pros And Cons Of Investing In Mutual Funds

A guide on the pros and cons of investing in mutual funds in India. From the potential for high returns to the risks involved.

EXPLORE FUNDS
4 mins
23 August 2023

In the world of finance, investing has become more accessible than ever, and one popular option that has garnered attention is mutual funds. Mutual funds provide a way for individuals to invest their money in a diversified portfolio of assets managed by experts. Let’s understand the advantages and disadvantages of investing in mutual funds, helping you make a well-informed decision about whether they align with your financial goals.

Mutual funds: An Overview

Before we dive into the pros and cons, let's clarify what mutual funds are. Mutual funds pool money from multiple investors to invest in various assets like stocks, bonds, or other securities. Professional fund managers oversee these investments, aiming to achieve the fund's objectives, whether it's growth, income, or a combination of both.

Advantages of Investing in Mutual Funds

  1. Professional management: Mutual funds are managed by professional investment managers who have the expertise and experience to select and manage a diversified portfolio of assets. This can be a daunting task for individual investors.
  2. Diversification: Mutual funds spread investments across various sectors , reducing the risk associated with putting all your eggs in one basket.
  3. Liquidity: Open-ended Mutual funds can be bought and sold easily, which makes them a flexible investment option. This means that you can easily access your money if you need it.
  4. Low minimum investment: Mutual funds typically have low minimum investment requirements, which makes them accessible to a wide range of investors.
  5. Tax benefits: Certain mutual funds, like Equity-Linked Savings Schemes (ELSS), offer tax advantages under specific sections of the Income Tax Act.
  6. Ease of investment: Mutual funds can be invested in through a variety of channels, such as online platforms, banks, and brokers. This makes it easy for investors to get started.
  7. Transparency: Mutual funds are required to disclose their portfolio holdings and performance on a regular basis. This makes it easy for investors to track their investments.
  8. Accessibility: Even with a small investment, you can access a diversified portfolio that might otherwise require a significant amount of money.
  9. Variety: There's a range of mutual funds tailored to different risk appetites, investment goals, and time horizons.
  10. Convenience: With investment plans like Systematic Investment Plans (SIPs), you can invest small amounts regularly, promoting disciplined saving.

Disadvantages of Investing in Mutual Funds

  1. Fees and Expenses: Mutual funds charge a variety of fees, such as management fees and transaction fees. These fees can eat into your returns.
  2. Lack of Control: Investors have limited control over specific investments made by the fund manager.
  3. Market Risk: The value of mutual funds can go up and down, just like the stock market. This means that you may lose money if you invest in a mutual fund.
  4. Possible Underperformance: The fund's returns might not always beat the market or meet your expectations.
  5. Complexity: Mutual funds can be complex, and it can be difficult to understand their risks and fees. This can make it difficult for investors to make informed decisions.

Why Invest in Mutual Funds

Investing in mutual funds provides an opportunity to tap into the financial markets without needing extensive knowledge. They are suitable for beginners and busy individuals who don't have time to manage their investments actively. Additionally, the potential for diversification, professional management, and the availability of tax-saving options makes mutual funds an attractive investment avenue.

Mutual funds offer a compelling way to enter the world of investing, they can be a stepping stone to achieving your financial aspirations, but like any financial decision, they come with both advantages and disadvantages. Consider your financial goals, risk tolerance, and investment horizon before diving in. With proper research and understanding, you can leverage their benefits while being mindful of their limitations.

Start your investment journey today by exploring more than 1000 schemes on the Bajaj Finserv Mutual Fund Platform.

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Frequently Asked Questions

Are Mutual Funds Better Than Stocks?

Mutual funds offer diversification and professional management, making them suitable for risk-averse investors. Stocks provide potential for higher returns but come with greater risk and require individual stock selection.

What is the main advantage of mutual funds?

The main advantage of mutual funds is diversification, as they pool investors' money to invest in a variety of securities, spreading risk. They also offer professional management and liquidity.

Is mutual fund a good investment or not?

Mutual funds may be a good investment choice depending on your financial goals, risk tolerance, and investment horizon. It's essential to research and select funds that align with your needs.

Are mutual funds risky or not?

Mutual funds carry varying degrees of risk depending on their asset allocation and investment strategy. While some funds are relatively low-risk, others can be riskier, particularly those heavily invested in stocks or bonds. Assess your risk tolerance before investing.

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Disclaimer

Bajaj Finance Limited (“BFL”) is a Non-Banking Financial Company carrying the business of acceptance of deposits, providing lending solutions to Retail & Corporate customers, and is a Corporate agent of various insurance Companies. BFL is also registered with the Association of Mutual Funds in India (“AMFI”) as a distributor of third party Mutual Funds (shortly referred as ‘Mutual Funds’).

BFL does NOT:

(i) provide investment advisory services in any manner or form;

(ii) perform risk profiling of the investor;

(iii) carry customized/personalized suitability assessment;

(iv) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.


In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on ‘As-is’ basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme /Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities. The NAV will inter-alia be exposed to Price / Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other / better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

Bajaj Finserv Direct Limited, (“BFDL”), a wholly owned subsidiary of Bajaj Finserv Limited (is a Registered with SEBI as an Investment Advisor with Registration no. INA000016083). BFDL enables resident Indian customers to directly invest in third party mutual funds through its online platform. BFDL entered into a referral arrangement with BFL, whereunder, BFL may, without risk or responsibility on its part, refer the resident Indian customers who are interested in placing their investments in Direct Mutual Funds through BFDL online platform. Investment by a person residing outside the territorial jurisdiction of India is not acceptable nor permitted.

Disclaimer on Risk-O-Meter:
Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc. and shall also consult their financial advisers, if they are unsure about the suitability of the scheme before investing