We live in interesting times – on the one hand, the interest rates are continuing to fall and on the other hand, the equity markets are scaling new highs. As interest rates fall, 2 major things tend to happen – firstly, the cost of loans starts to go down i.e. loans in all shapes and forms – home, car, personal, etc. will all be less expensive. Secondly, fixed rate investment options such as PPF, FD, EPF, etc. will all provide lower returns. As this happens, market-linked investment options such as mutual funds become a more lucrative investment route for individual investors. Some of the leading mutual fund houses that an investor can choose from, include Franklin India Mutual Fund AMC, Kotak Asset Management Company, Sundaram Mutual Fund AMC, Axis Mutual Fund AMC, etc.
Advantages of Mutual Fund Investments Following are the key advantages of the mutual fund investments: • Diversification – Diversifying your investments i.e. not keeping all your eggs in one basket is by far the most effective way of reducing overall risk of the investment. Mutual funds have a large amount of capital at their disposal hence they are better suited to make diversified investments. • Professionally Managed – These funds feature a fund manager who is backed by a team of subject matter experts to ensure the best investment is chosen for the fund. The best investments are, however, not dependant on the rate of return, they could include features such as P/E ratio, current valuation and so on. • Transparent Dealings – Mutual fund houses are mandatorily required to publish all the key data regarding their funds including but not limited to expense ratio, current NAV, current portfolio, total AUM of each scheme option and so on. Thus all these information in the case of any fund house including Sundaram Mutual Fund AMC’s funds can now be checked online. This ensures that you can always track all your investments without leaving the comfort of your home or office. • Lower Volatility – Though mutual fund investment valuations are dependent on market movements, unlike share prices that can change almost every second, mutual fund prices change only once in a day, therefore, their valuation is less prone to volatility as compared to stock exchange prices making these funds a better investment choice as compared to direct stock/bond investments.
Disadvantages of Investing in Mutual Funds
The list of disadvantages in case of this format of making investments is a relatively short one and there are already a number of tactics that asset management companies like Sundaram Mutual Fund AMC implement to mitigate this.
- Investment Risk – This is obviously as a result of the fact that these investments are market-linked i.e. the value of the investment changes with changing market conditions. Hence, when markets are high, the value of your investments will increase, while they will fall when the opposite happens. To mitigate this risk, mutual funds employ the diversification strategy and ensure that exposure to a specific sector/market capitalisation is minimized.
- Liquidity risk – Mutual funds feature an inherent liquidity risk especially in case of equity mutual funds, which are invested mainly in company stock. Thus getting your money back in case of an emergency might be a bit of an issue, moreover there are often exit loads to contend with in case of equity investments. Therefore in order to mitigate such risks, individuals can choose to explore alternatives such as debt and hybrid funds, which feature a higher degree of liquidity.
These are only a handful of advantages and disadvantages of mutual fund investments. There are many more advantages not mentioned above that make mutual funds a popular choice for investors seeking medium to long term capital appreciation.
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