Mutual funds – advantages and disadvantages

Continuing the mutual fund tutorial, for whom is a mutual fund suitable? Well it is suitable for people who do not have ALL THE THREE :

  • Time
  • Lots of money
  • Skills of stock picking, portfolio construction and fund management skills.

Then you go for mutual funds. Mutual funds give you the following advantages:

  • Portfolio diversification –  with a small  amount of money you buy a  lot of shares
  • Professional management  –  a  paid service which specialises in fund management
  • Reduction/diversification of risk  –  share specific risk is completely removed
  • Reduction of transaction costs  –  It is cheaper  for a  retail investor  to  invest through a mutual fund
  • Liquidity
  • Convenience and flexibility  –  invest  when  you  are earning, withdraw when you have retired.

Apart from these if you have maintained a portfolio of equity shares you realize the headaches of keeping track of dividends, rights issue, warrants exercise, etc.

However, mutual funds do not come without any disadvantages. Let us look at the Disadvantages

  • No control over cost  –  if  you  do not like the  cost of a fund you  can go  elsewhere , but  you  cannot  negotiate.
  • No tailor-made portfolio –  you have to take the  portfolio  given  by the fund manager.
  • Managing a portfolio of fund  –  once  it was  thought  you had  to invest in  one mutual  fund and then relax. Now there is such a  huge  range  of  mutual funds  that  you need to create a  portfolio  of  funds.

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