Advantages and Disadvantages of Mutual Funds: A Comprehensive Guide for Indian Investors

Fri, 9 May 2025

5 mins

Mutual Funds

Mutual funds have become one of the most popular investment vehicles in India, thanks to their accessibility, transparency, and professionally managed approach. But like any financial product, they come with both advantages and disadvantages. Whether you're a first-time investor or looking to diversify your portfolio, understanding the key pros and cons of mutual funds is crucial before making any decisions.

• Key takeaways

  Advantages of Mutual funds:

  • Professional Management
  • Simplified Investing Experience
  • Affordable Diversification
  • Economies of Scale
  • Liquidity
  • Tax Efficiency and Deferral
  • Regulatory Comfort

  
  Disadvantages of Mutual funds:

  • Lack of Portfolio Customization
  • Choice overload
  • Cost control
  • No Guaranteed returns

• Advantages of Mutual funds

  Professional Management
  One of the core benefits of mutual funds is that they are managed by experienced fund managers. These professionals conduct in-depth research, monitor market trends, and construct portfolios in alignment with your investment objectives. They also take care of administrative tasks such as collecting corporate benefits (dividends or interest, rights issues, buybacks, etc.), or follow up on the same.
  
  It significantly reduces the operational burden on individual investors.
  All these benefits come at a very low cost and are available even for the smallest investments. Further, the expenses charged for professional management of funds are quite reasonable.

   

  Simplified Investing Experience
  Unlike direct stock market investments that require broking accounts, demat accounts, and constant monitoring, mutual funds offer a seamless experience. Investors can simply choose a scheme that aligns with their goals and let the fund manager handle the rest. The daily calculation and publication of the Net Asset Value (NAV) ensures full transparency and accountability.

   

  Affordable Diversification
  Even with a small investment via mutual fund, you can gain exposure to a diversified portfolio. Diversification helps reduce risk by spreading investments across sectors and asset classes. Achieving this kind of diversification through direct investments would require a much larger capital outlay, often amounting to several lakhs.

   

  Economies of Scale
  Because mutual funds pool money from many investors, they enjoy cost efficiencies that individual investors cannot. The scale allows for better negotiation with service providers like brokers and bankers and spreads administrative and research costs over a larger base. This results in lower costs for investors while still providing the benefits of professional management.

   

  Liquidity
  At times, investors in financial markets are stuck with a security for which they can’t find a buyer–worse, at times they can’t find the company they invested in. Such investments, whose value the investor cannot easily realize in the market, are technically called illiquid investments and may result in losses for the investor.
  
  Mutual funds offer varying levels of liquidity depending on the scheme type. In open-ended schemes, investors can redeem units at any time at prevailing NAV. For close-ended schemes, units can typically be sold on a stock exchange. This liquidity offers a level of financial flexibility that’s not always possible with other investments, especially in markets like bonds where retail participation is limited.

   

  Transparency and Regulatory Oversight
  Thanks to SEBI’s regulations, mutual funds are required to disclose key information such as scheme objectives, risk levels, portfolio holdings, and daily NAVs. This allows investors to make informed decisions. Documents such as portfolio disclosures, NAV of the scheme, Scheme Information Document (SID), Statement of Additional Information (SAI), and Key Information Memorandum (KIM) are publicly accessible even before an investment is made.

   

  Tax Efficiency and Deferral
  Mutual funds offer a tax-efficient way to grow wealth. Income generated within the fund is not taxed until the investor exits. This deferral allows compounding to work more effectively over the long term. Additionally, schemes like Equity Linked Savings Schemes (ELSS) provide tax deductions of up to ₹1.5 lakh under Section 80C of the Income Tax Act, offering dual benefits of tax savings and market participation.

   

  Systematic Approach to Investments 
  Mutual funds offer convenience through options like growth or income distribution (IDCW), allowing investors to tailor returns to their needs. Systematic Investment Plans (SIPs), Systematic Withdrawal Plans (SWPs), and Systematic Transfer Plans (STPs) further add to this flexibility by promoting discipline and helping investors align their investments with long-term financial goals.

   

  Ease of Access and Reinvestment
  Once an investment is made, mutual funds simplify subsequent transactions. Investors can make additional purchases with minimal paperwork. Features like partial withdrawals and top-ups make mutual funds a highly adaptable tool for dynamic financial planning.

   

  Regulatory Comfort
  SEBI has implemented a strong framework to protect investors through rigorous norms on disclosures, transparency, fund management practices, and risk management. This offers an added layer of security for investors who may be concerned about mismanagement or fraud.

• Disadvantages of Mutual Funds

  While mutual funds offer a range of advantages, they also come with certain limitations that investors should be aware of before making a decision.

   

  Lack of Portfolio Customization
  One of the key drawbacks is the lack of portfolio customization. Large investors sometimes opt for Portfolio Management Services (PMS), which offer greater control and personalization. In a PMS, the investor can influence which securities are bought and sold, allowing for a tailored investment strategy. 
  
  Mutual funds, however, operate differently. When an investor purchases units of a mutual fund scheme, they become one of potentially thousands of unit-holders. Investment decisions are made entirely by the fund manager, based on the scheme’s stated investment objectives. As a result, investors in mutual funds have no direct say in the selection of individual securities or portfolio allocation.

   

  Choice overload
  Another challenge is choice overload. The Indian mutual fund industry is home to a wide range of schemes across asset classes, offered by multiple fund houses. Within each category, investors may encounter various options such as regular or direct plans, growth or dividend payout (IDCW), and active or passive strategies. This abundance of choice can make it overwhelming for investors to identify the most suitable scheme for their goals. 

   

  Cost control
  In Mutual funds all investor money is pooled together in a common fund, the expenses incurred - such as fund management fees, administrative costs, and marketing charges - are shared proportionally among all unit-holders. Individual investors have no control over how much they pay in terms of fund expenses. 
  
  That said, SEBI has placed upper limits on expense ratios based on the size and nature of the scheme, ensuring investor protection. Additionally, competitive market dynamics have led many fund houses to operate well below the regulatory ceiling, which can work in the investor's favor over time.

   

  No Guaranteed returns
  Mutual funds are structured as pass-through vehicles, meaning that the risks and rewards of the underlying investments are passed directly to the investors. The performance of a mutual fund is influenced by multiple factors - market conditions, the returns generated by individual securities, and the skill of the fund manager. 
  
  While the fund manager can strive to optimize returns through strategic asset allocation and timely decision-making, external factors like market volatility and macroeconomic trends remain outside their control. Consequently, returns may fluctuate, and investors should align their expectations accordingly.

• To Bring it to a close

  Mutual funds remain a powerful tool for wealth creation, but understanding their limitations is just as important as recognizing their benefits. If you’re unsure whether mutual funds are the right fit for your portfolio - or if you're looking for more personalized investment solutions - ask your Relationship Manager.
  
  You can also open your account and get started today with InCred Premier for a curated investment experience designed around your goals. If you need any further assistance you may reach out to us at  8047593769 and we can help you start your investment journey.