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Variety of modes of investments: Mutual funds also offer investors flexibility in terms of modes of investment and withdrawal. Investors can opt for investment modes like lump sum (or one time), systematic investment plans (SIP), systematic transfer plans (STP) and systematic withdrawal plans (SWP). You can invest in growth option of mutual funds if you want to take advantage of compounded returns over a long investment period or you can invest in dividend option if you want income from your investment.
Disciplined investing: Mutual funds encourage investors to invest over a long period of time, which is essential to wealth creation. Furthermore, systematic investment plans or SIPs encourage investors to invest in a disciplined manner to meet their various financial goals. Many investors fail to build a substantial investment corpus because they are not able to invest in a disciplined way. Mutual fund SIPs help investors to maintain a disciplined approach to investment. SIPs also helps investor take emotions out of the investment process as very often investors get very enthusiastic in bull market conditions, but get nervous in bear markets. It is an established fact that investments made in bear markets help investors get high returns in the long term. By investing through SIPs in a mechanical way, investors can stay disciplined, which is one of the biggest benefits of investing in mutual funds.
Disadvantages of Mutual Funds
However, there are also disadvantages to being an investor in mutual funds. Here's a more detailed look at some of those concerns.
High Expense Ratios and Sales Charges
If you're not paying attention to mutual fund expense ratios and sales charges, they can get out of hand. Be very cautious when investing in funds with expense ratios higher than 1.20%, as they are considered to be on the higher cost end. Be wary of 12b-1 advertising fees and sales charges in general. There are several good fund companies out there that have no sales charges. Fees reduce overall investment returns.
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