Inflation is snowballing. To cope with the growing cost of inflation, one needs to plan investment at an early stage. When we think about investment, we can choose from multiple options available in the financial market. Traditional tools provide a nominal return on your investment, while mutual funds offer varied products suitable for different needs with attractive return potentials.
What is a Mutual Fund?
A mutual fund is a pooled investment vehicle that collects the savings of several investors who share a common financial goal. It manages the investors’ money by investing in securities to generate a return. It charges fees from that return generated, and the remaining return is passed on to the investors.
One of the main advantages of investing in mutual funds is that it provides investment diversification. This means that the money invested is spread across various companies and sectors, which reduces the risk of losing all the money in case of a market volatility downfall of one company or sector.
Concerns amongst investors are prevalent when they start investing money in any financial asset class as they put their hard-earned money into that investment.
Let us address and discuss the different concerns in detail for better understanding.
Risks and Disadvantages of Mutual Funds
- Market Risk – When we choose to invest in securities, there will always be a market risk i.e. the macro-economic risks all firms in the economy are exposed to. You can’t control the market risk, but you can be prepared for it. Understanding the market risk and diversifying your investment can help you survive the market storm.
- No Guarantee – Compared to other traditional tools available in the market, there is no guarantee that you would get a minimum of this much return or that your principal is protected. As we know, mutual fund returns are subject to market risk.
- Management Risk: Mutual funds also include management risk, which means that the fund manager may not perform well and could not generate the requisite return. Sometimes, even experienced fund managers can get caught off guard by unexpected market events or make emotional decisions based on fear or greed.
- High annual expense ratio: Mutual funds must disclose how much they charge their investors annually in percentage terms to compensate for the cost of running an investment business. The percentage of expense ratio reduces the mutual fund’s gross return.
- Mutual Fund Loads: Mutual funds may apply exit loads, which are one-time expenses levied when exiting a mutual fund scheme. The charges applicable here are as follows.
- Exit Load: The exit load must be paid when an investor exists in the mutual fund scheme within a short span. This fee is levied to stop investors from opting out of the scheme.
- Transaction Charges: An investor must pay a nominal amount as transaction fees. For example, if A wants to invest 10,000INR into a mutual fund and transaction charges are 100INR, then that investor will have 9,900INR in total to invest.
- Other Costs – Investors incur indirect costs during the investment journey, including opening and maintaining a demat account, brokerage charges, etc. While buying and selling stocks, a security transaction tax is levied, which must be paid by investors.
As mentioned earlier, professionals manage mutual funds, making smart decisions for investors like you. This way, you can gain from the manager’s knowledge and experience. Keep in mind that due to rules and regulations, many funds may dilute returns, which could limit potential returns.
Investing in mutual funds isn’t risk-free, but risk can be minimized in an effective way to grow your wealth over the long term. By managing expectations, understanding risks, and choosing the right funds for your needs, you can turn this rollercoaster into a smooth and rewarding ride towards your financial goals. Remember, knowledge is power, and with a little research and guidance, you can navigate the world of mutual funds with confidence.
If you are still confused about your investment journey and need guidance, then book a meeting with our wealth advisor.
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