Advantages and Disadvantages of mutual funds

The Good EMI

A popular asset management company has re branded a systematic investment plan as a good EMI. Indians are loving to invest via SIP in various mutual funds. According to a popular news website, the end of 2016-17 witnessed that India has 1.35 crore SIP accounts and more than 43 thousand crore rupees being bought into the equity markets through SIPs.

However this has happened in parallel with low returns seen across the traditional asset classes which Indians have invested in including real estate, fixed deposits and India’s favorite asset – gold. Smaller cities in India have also contributed to the rise of SIPs.

With everyone and their tailor talking about investing in mutual funds, it would be prudent to get perspectives on both the pros and cons of mutual funds. We have listed down both of these.

Advantages:

a) Inculcates sense of discipline -> Apart from patience, discipline is required to succeed as a long term investor. When you set up auto debit for money to be invested in mutual funds from your bank every month, you are creating a process that ensures you are setting aside money to invest regularly.
b) Can outsource to a knowledgeable person -> Most fund managers have stellar academic credentials as well as an envious record in selecting the right time to not only invest in stocks but also exit from them. You can focus on your business or service and the fund manager would make sure that your money is being used to buy and shares at a favourable prices.
c) Start small -> Most SIPs can be started with as low as Rs 500 per month. This is roughly equivalent to the cost of one pizza from Dominoes. At some point of time, only wealthy or enterprising individuals could get to invest and hence participate in the wealth creation journey of stock markets. Thanks to the low entry amount, creating wealth over the long term has become a democratic affair.
d) Easy to compare – There are platforms such as Moneycontrol or Valueresearchonline through which one can compare the performance of several mutual funds across different time frames. One can also check out the portfolios of each of these funds.

Disadvantages:

a) No dividends -> Don’t be fooled by the dividends that mutual funds claim to pay you. It is not extra money which you are getting as it would be in the case of dividends earned from shares. In this case, a small part of your mutual fund portfolio is stripped and presented to you as dividend.
b) Cannot take brave calls -> Heard about that company which is making a stellar turn around and is poised to create substantial share holder wealth over the next three years? But your mutual fund manager may not buy its shares unless certain hygiene factors are in place. Follow the herd mentality also develops as most fund managers may end up buying only if the leader among their pack has bought.
c) Lack of concentration -> A mutual fund would have deployed your investment across various companies. But serious money is made when you back your conviction with capital.Fund managers cannot afford to skew their investment deployment in the favor of any such promising company.
d) Cannot decide -> You cannot decide shares of which stock your fund manager may buy or sell.

I personally evangelize investing in mutual funds through a systematic investment plan to new investors. However, as we are in an overpriced market, it would be prudent to look at mutual funds in a comprehensive manner and decide the quantum of exposure.

                                     

HAPPY INVESTING!

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