History, Need, Advantages and Disadvantages of Mutual Fund

Content – Advantages and Disadvantages of Mutual fund
1. Short History of Mutual Fund
2. What is Mutual Fund?
3. Needs to Invest in Mutual Fund
4. Advantages of Mutual Fund
5. Disadvantages of MF
6. Download PPT Free

1. History of Mutual fund

In 1964, the Unit trust of India was the only single Mutual Fund Entity in India. After this 167 schemes & eight new funds was set up by Banks, LIC, and GIC. In 1988, this business grows to 6700 Crore. In 1993, Foreign & Private players enter the Industry.

The Securities and Exchange Board of India (SEBI) formulated the Mutual Fund regulation in 1996. This is the first time framework regualtion for the mutual fund industry. In 2014, there are around 45 mutual fund organizations in India together handling assets worth nearly Rs 10 lakh crore.

2. What is Mutual Fund?

A mutual fund is an investment fund that collects money from different investors and makes large funds to invest money in securities, i.e. Stock, Bonds, shares, and other investment securities. The investments are made by an “asset management company” (AMC) also known as the Mutual Fund Company.

Any Income or Gain generated from investments is distributed among the investors. Mutual Funds can be risky, but they can also make bumper returns. Mutual Fund investment is made by Experts & Professionals. Some Mutual Fund companies are Axis Mutual Funds, Kotak Mutual Funds, etc.

3. Reasons to Invest in mutual fund

1. Specialist Management 

Generally, A Novice/New investor doesn’t have much knowledge about how to & where to invest. So their mutual fund companies come up. Mutual fund investment is managed by experts/Specialists. Experts collect money from all investors and invest in different securities to make safe & Good returns.

A mutual fund company expert manages and keep the eye on Investment. A person who wants to invest money can do easily this by Mutual Fund companies.

2. Anyone Can Invest

The best part of the Mutual Fund is anyone can invest. For most mutual funds, the minimum amount of investment is Rs 500. The maximum investment can go up to the investor’s wish.

Before investing in Mutual Funds, an investor should consider Investing expenses, risk-taking ability, and investment goals.

3. Tax Saving Option

Mutual Funds also provide tax-saving options. Mutual Funds investments have a tax saving option under section 80C of the Income Tax Act. An investor can get ₹1.5 lakh tax exemption of Income Tax in a year.

ELSS (Equity link saving scheme) is a mutual fund scheme that provides higher return & tax saving options than other tax-saving instruments like PPF, NPS, and Tax Saving FDs. Some of the mutual funds are taxed based on tenure. Next is advantage and Disadvantage of Mutual Fund

4. Advantages of Mutual Fund

1. Easily Conversion into Cash
2. Diverification
3. Helps to Invest in smaller amount
4. Lower investment cost
5. Easy to buy & Start
6. Brings proctection & Safety
7. Lowest lock in period
8. Helps to lower the tax

1. Easily Conversion into Cash

The most important benefit of investing in a Mutual Fund is that the investor can withdraw their investment at any time. Due to easily conversion of mutual fund investment units into cash helps to increases liquidity. An investor should also consider penalty or fee charges to withdraw an amount before a specified date.

2. Diversification

Diversification means creating a portfolio or Investing in different securities to reduce risk. It becomes effective when one investment turns into loss and another investment brings profit. Mutual fund companies use diversification so overall investment or portfolio becomes less risky & volatile.

For Example- A person invests some money into two companies. If one of the companies turns into loss but another one got profit so the loss can be set off against profit.

3. Helps to Invest in Smaller Amounts

A mutual fund is very flexible in nature. An investor doesn’t need to start with a huge investment. Anyone can start with the minimum investment of Rs 500. It becomes easy to invest with Mutual funds.

There is also s SIP (Systematic Investment Plan) feature which lets any person to invest a fixed amount every month, quarter, yearly. This is a good feature for a salary-based person. That person can invest according to their budget, income, etc.

4. Lower investment cost

Another benefit of Investing through a Mutual Fund is lower investment costs. This is because mutual fund companies purchase securities in single transactions as compared to investor’s different transactions.

Moreover, Assets management services cost is divided between all the investors so it brings down to lower investment cost.

5. Easy to Buy & Start

The next main advantage is investing in mutual funds is very easy. People can invest via offline & online mode. People can also access their portfolios anytime. An AMC offers the funds and distributes them through channels like Brokerage Firms, Registrar, CAMS, and Online Mutual Fund Investment Platforms i.e. Grow, Upstox App.

6. Brings Proctection & Transparency

As per SEBI guidelines, all mutual fund companies should label their schemes, and offers. Mutual Fund schemes need to have color-coding labels. There are three color-coding which indicates different levels of risk & safety.

1. Blue indicates low risk
2. Yellow indicates medium risk
3. Brown indicates a high risk

7. Lowest Lock-in Period

Another benefit of Tax Saving Mutual Funds is the lowest lock-in periods of 3 years. This is lower as compared to other tax-saving options like FD, ULIPs, and PPF because these options have 5-year lock-in periods. In mutual funds, you can exit after 3 years without any fines.

8. Helps to Lower the Tax

Equity-linked saving scheme (ELSS), an investor can save income tax up to Rs. 1.5 Lakh a year under 80C of Income Tax Act. All other types of Mutual Funds are taxable based upon the type of fund and time.

Before making an investment one should keep in mind the various advantages Mutual Fund provides. Thorough knowledge of the benefits of Mutual Funds would lead to better gains in the future.

5. disadvantages of mutual fund

1. High Management Cost

Some mutual fund has high associated cost with them. As mentioned above, Experts manages and operates the mutual funds so mutual funds add charges for managing the fund, manager salary, distribution cost, etc. Depending on the fund these charges can be significant. Moreover, if you exit mutual fund they charges high cost as exit load.

2. Lock-in Periods 

In Mutual fund there is a Equity-linked Saving Scheme which has a lock-in period of 3 years. It means no one can withdraw invested money before 3 years in any case. However, You can take a loan from a bank by using this mutual fund investment as collateral. 

3. Dilution

This is the biggest disadvantage of all the disadvantages. Diversification generally averages all your investments, and saves you from suffering any major losses, but it also prevents you from making major gains!. Thus major gains get diluted. This is the reason that people do not invest in too many mutual funds. 

4. Fluctuating returns

Mutual funds do not offer fixed guaranteed returns. You should always be prepared for any fluctuations including depreciation in the value of your mutual fund. In other words, mutual funds investment has a lot of return changes as it is linked to stock market. Sometimes even expertise fund managers get huge losses.

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