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Indian Stock Market >> Mutual Funds >> Pros and Cons

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Pros and cons

Every investment has advantages and disadvantages. But what is important to remember is that as the choices and preferences of each investor vary, the advantage of a particular feature for him will depend on his unique circumstances. Generally, mutual funds provide quite an attractive investment choice for investors because they generally offer the following features viz. Professional Management, Diversification which means spreading your investments across a wide range of companies and industry sectors, Affordability in the sense that one can enter in mutual funds even with relatively less invest able amounts, Liquidity by way ready availability of redemption of you shares at the extant NAV at any point of time.

But mutual funds also have features that some investors might view as disadvantages, such as costs as investors pay sales charges, annual fees, and other ancillary charges irrespective of the fund’s performance and fund giving negative returns, Lack of control as investors can neither determine the composition of a fund's portfolio nor can they directly influence the buying behavior of fund manager, Price uncertainty as unlike with an individual stock, with a mutual fund, the purchase price or redemption price of the shares will depend on the fund's NAV.

How Funds Can Earn Money for You
One can earn money from the investment in mutual funds by way of various ways including Dividend Payments as a fund may interest on the securities in its portfolio the income earned in the form of dividends. The shareholders generally get most of that income. Capital Gains as when the fund sells a security that has increased in price, the capital gain (minus any capital losses) is distributed to investors at the end of the year. Increased NAV of the shares of the fund increases if the market value of a fund's portfolio increases after deduction of expenses and liabilities. The higher NAV reflects the higher value of investment.

The biggest advantage of mutual funds is that for ordinary investors, who do not have much knowledge about stock market operations, the professional management of funds allows them to earn decent returns over a period of time. However keep in mind that like all stock market investments, mutual funds are also not free from market risk of adverse price movement of securities where funds park your money. Hence do your due diligence about the history of funds, fund managers who would be handling your funds and use the route for medium and long term investment.

HAPPY EARNING!!!

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