Disadvantages of mutual funds:
No control over day-to-day fund management decisions. Applicability of fees like expense ratio and exit load. Returns not guaranteed - NAVs fluctuate with market movements. Risk of fund manager underperformance or mismanagement.
Potential for loss: Mutual funds are not FDIC insured and may lose principal and fluctuate in value. Cost: A mutual fund may incur sales charges either up-front or on the back end that are passed on to the investors. In addition, some mutual funds can have high management fees.
The chances of your mutual fund investment value going to zero are practically almost impossible as it would mean that all the assets in the fund's portfolio will have to lose their entire value. However, the returns from a fund can go to zero or even become negative.
One of the reasons is lack of knowledge. They don't know what mutual fund is or what stock market is. Schools or college don't teach this subject so most people never know. I myself didn't know ABC of stock market till 2018.
Mutual funds come with many advantages, such as advanced portfolio management, dividend reinvestment, risk reduction, convenience, and fair pricing. Disadvantages include high fees, tax inefficiency, poor trade execution, and the potential for management abuses.
Yes, you can withdraw money from most mutual funds anytime, unless they have a lock-in period. What is the right time to redeem mutual funds? The right time to redeem mutual funds depends on your financial goals and the performance of the fund.
NAV of Mutual Funds Come Down
When NAV comes down following a crash, so does your investment's worth. Let's understand it with an example. Suppose a fund's NAV before a crash is 50, and you have 1000 units of it. So, the value of your investment is Rs 50,000 (50 X 1000).
Typically, well managed diversified equity funds have managed to outperform the index over a 5 years period but they have also outperformed other asset classes by a margin when a period of 10 years and above is considered.
Just as with stocks and bonds, mutual funds generally have market risk, meaning that prices can fluctuate up and down. They also have principal risk, which means you can lose the original amount invested. Remember that investments cannot guarantee growth or sustainment of principal value; they may lose value over time.
Mutual funds keep a portion of their assets in cash and highly liquid securities. This ensures they can meet redemption requests from investors. The amount held in liquid assets is carefully balanced with the fund's investment objectives.
Profits gained from investment in mutual funds are known as 'Capital gains'. These capital gains are subject to tax. So, before investing in mutual funds, you should clearly understand how your returns will be taxed. Moreover, you can also avail tax deductions in certain cases.
Do you know the Rule of 72? It's an easy way to calculate just how long it's going to take for your money to double. Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.
Downside risk is an estimation of a security's potential loss in value if market conditions precipitate a decline in that security's price. Depending on the measure used, downside risk explains a worst-case scenario for an investment and indicates how much the investor stands to lose.
MFs are also a cost-effective investment option for investors. They have a lower entry cost than other investment options such as stocks or real estate. In addition, MFs also have lower transaction costs and management fees compared to other investment options in the market.
1. Market risk. The risk that you will lose some or all of your principal. As markets fluctuate, there is always a possibility that the mutual funds you hold might be caught in a decline.
Index-tracking ETFs typically cost less to own than mutual funds because they require less active management and charge lower fees. ETFs often provide more tax advantages since investors only pay capital gains taxes when they sell their shares.
Funds are liquidated for a variety of reasons, with poor performance ranking as one of the primary causes. Poor performance reduces asset flows, as investors choose not to buy into a fund that isn't doing well. It also brings down the mutual fund management firm's track record.
Mutual funds tend to be less risky than individual stocks, because they are more diversified — meaning they contain a mix of investments.
However, while the return on your investment (ROI) can be negative, there is no way your investment itself becomes negative – meaning you owe money to someone – that is NOT POSSIBLE.
Withdrawing mutual fund investments before the maturity date can attract penalties such as exit loads. Exit loads are fees charged by mutual fund companies to discourage premature withdrawals. Additionally, early redemption may result in higher short-term capital gains taxes compared to long-term capital gains taxes.
Upon Reaching Your Goal
For long-term goals, like children's education or retirement, where investment is generally made in equity funds, it's wise to exit a couple of years before and deploy the proceeds in relatively safer instruments like debt funds or fixed deposits.
Yes, you can earn monthly income from mutual funds through two main ways: dividend option and systematic withdrawal plan (SWP). The dividend option distributes a portion of the fund's profits to investors periodically, while SWP allows you to withdraw a fixed amount from your investment at regular intervals.