Question

What are the advantages and disadvantages for investing in funds; Is it worth the risk? if there are any risks, list and identify them (around 300-400 words)

please without plagiarism, thank you :)

Answer 1

Mutual fund are common form of investment when one is looking for making returns from equity markets as well as debt market. there are various advantages as well as disadvantages associated with investment into Mutual funds. Advantage of investment into mutual funds are as follows-

1. Advanced portfolio management- Mutual Funds are managed by professionals who are experts from their respective fields. They proactivelym manage Mutual Funds on the behalf of the investor in exchange of certain fees.

2. Dividend reinvestment- the mutual funds are managed by advanced professionals they reinvest in the dividend which exceeds the normal rate of return provided by commercialized banks and offers a better opportunities for investors.

3. Risk reduction-the portfolio of mutual funds are invested into different gambit of securities. It is well diversified into different sectors. The assets are allocated in adequate proportion into different sectors so that the firm specific risks are mitigated and minimised to the lowest possible extent.

4. Convenient and fair pricing- the mutual funds are convenient to buy into and they are fairly priced for investors. They can be bought into smaller units as well as they can be bought into higher quantities depending upon the appetite of different investors.

There are various disadvantages in investment in mutual funds. there are as follows-

1.Tax inefficiency- The returns made from mutual funds are are highly taxable and there is no scenario of any kind of text deduction associated with them. Payment of taxes minimise overall return made from investment.

2. High professional fees- many mutual funds charge amount of professional fees for management of the portfolios of different investors in mutual funds.this is charged in form of entry loss and exit loads and they tend to have a negative effect on the Overall return made from the mutual fund. It significantly diminishes the overall rate of return made by mutual fund holders.

3. Potential for management abuses- it is often seen that portfolio managers take very high Risky bets which can significantly reduce the overall net asset value of the fund. The fund managers are entrusted with the responsibilities for making returns for fund holders but they abuse the responsibility attached to them.

Mutual funds invest in the the stock markets and other marketable securities. they are not hedged against the risk associated with the underlying assets so it can never be said that people will make guaranteed return out of mutual funds due to these uncertainty associated with the investment into search risky assets class.

It is better to invest into the mutual fund after proper knowledge of how they operates and underlying assets they are invested into.