This investment choice offers you many advantages
Checking the lock-in period of the fund is vital before investing
Investing can be an overwhelming decision for many people. Even if there are many different investment options, none of them guarantee that you can make money by investing in them. But you can take advantage of the opportunities available and choose the best options after considering their pros and cons. Stocks are certainly a good choice to make money, but a mutual fund is a safe option to build wealth. This investment choice offers you many advantages like diversification, liquidity, and professional fund management. But most of you do not know the disadvantages of investing in it. Let us get an idea about the disadvantages of investing in mutual funds in this post.
Understand the pros and cons of investing in mutual funds
Mutual funds are among the most popular investment vehicles for many investors. It is one financial instrument that many investors consider adding to their investment portfolio. But every investor must understand the advantages and disadvantages of investing in this instrument. Managed in the form of a trust, it consists of an asset management company. Apart from that, it has a sponsor, custodian, and trustees. And the Asset Management Companies charge fees for offering their services. Expenses and fees are involved in the professional management of your fund. Besides, the value of funds might fluctuate depending on the market conditions. So, you must understand all such possible pitfalls before investing in mutual funds.
Understand the disadvantages of investing in mutual funds
Ensure to do your homework before investing in mutual funds. Get a deep understanding of the different types of funds available in the market and the advantages and disadvantages of investing. People try to understand the advantages of investing in a mutual fund. But it is equally important to know its disadvantages as well before investing in it. Take a look at the major disadvantages of investing in mutual funds.
High expense ratios and hidden fees
If you plan to invest in mutual funds, you must pay attention to their expense ratios. Mutual funds with expense ratios of more than 1.20% are among the high-cost end category. You also be cautious of sales charges and 12b-1 advertising fees. Fortunately, you can find funds that do not charge a 12b-1 fee. Most mutual fund companies disclose the hidden fees in their prospectus as well as on websites.
High sales charges
Every investor finds it difficult to pay the sales charge. But fortunately, you can find plenty of mutual funds with no-load. Choose funds that do not have any sales charges for investing. Investors indirectly pay the salary of the fund managers and market analysts. When you select a mutual fund, check its total management fees. Remember that high fees for managing the fund do not guarantee its better performance.
No doubt, diversification has its own advantages. At the same time, it also offers certain disadvantages. The main aim of diversification is to reduce the risk of loss. But if it is done aggressively, it might dilute your profits. So, avoid adding too many funds to your portfolio. Diversify your funds in such a way that their positive effects can be visible on your portfolio clearly for better returns.
Checking the lock-in period of the fund is vital before investing in mutual funds. Different mutual fund schemes have different lock-in periods, and many of them have long lock-in periods from five to eight years. Liquidity is an advantage of investing in mutual funds. It helps you to buy and sell your funds at your convenience. But some funds do not allow you to redeem the sum before the specified time mentioned by them. If you redeem it before the lock-in period, you need to pay the exit load.
Fluctuating returns is certainly a disadvantage of mutual funds because they are subject to market risks. You cannot expect a fixed return by investing in this instrument. Each of the funds in your portfolio carries a certain element of risk, and its returns are market-linked. So, you cannot expect guaranteed returns by investing in this financial instrument.
Lack of control
Investors do not have any control of the place where their money has been invested. What they can do is monitor their scheme portfolio passively.
Mutual funds have several disadvantages, but it is a preferred choice for many investors because of its advantages. You can make a diversified portfolio with this investment choice. One of the best advantages of mutual funds is that it offers the right scheme for everyone. Some funds offer high liquidity. It also offers you the chance to invest in small amounts, even as little as Rs.500/- a month. If you find a mutual fund a good investment option, approach a good fund advisor. As an expert, he can help you to get high returns with minimal risks. Mutual funds are the best instrument for investing as it helps to achieve your personal financial goals.