Are Mutual Funds Worth It in 2021

Are Mutual Funds a Ripoff

In today’s fast-paced, highly competitive world, there is one common mantra that is always on the lips of the successful: “In the long run, it is not how much money you make that determines your future wealth.” It’s about putting some of that money to work by saving and investing it.

This term specifically refers to the development of a secondary source of income that may function as a buffer to the challenges that one may have in generating a little bit of additional money, and in today’s world, there are two great possibilities for doing so: Investing in stocks or investing in a mutual funds.

However, many people assume that investing in stocks is significantly riskier than investing in mutual funds, which have a lot lower risk. Well to a point it is true as a mutual fund is a form of a financial vehicle made up of a pool of money collected from many people to invest in securities such as stocks, bonds, money market instruments, and other assets, with the risk of loss being minimized by investing in several places but there is always a concern in people’s minds about whether mutual funds are a scam or whether an investment in mutual funds provides actual benefits to consumers.

Also Read: Guide To Finding Undervalued Stocks Easily In 2021

Mutual Funds: Explained

Now, in order to grasp or know whether or not a mutual fund is truly beneficial to customers, we must first comprehend how a mutual fund operates. In essence, a mutual fund is both an investment and a corporation. This dual nature may appear odd, but it is no different from how a Samsung share represents Samsung Inc. When an investor buys Samsung shares, he is purchasing a portion of the company’s equity and assets. A mutual fund investor, on the other hand, is purchasing a portion of the mutual fund firm and its assets. The distinction is that Samsung makes revolutionary products and tablets, whereas a mutual fund company makes investments.

Mutual Funds as part of individual wealth has fallen by 13.64% in 2020 – Karvy Reports

The person who is associated with a mutual fund makes money in the following way –

  1. Income comes from dividends on stocks and interest on bonds held in the fund’s portfolio. When a fund pays out nearly all of its revenue over the course of a year to its shareholders, it is known as a distribution. Frequently, investors are given the option of collecting a dividend check or reinvesting their profits in new shares.
  • If the fund sells securities that have appreciated in value, it earns a capital gain. The majority of funds likewise transfer these profits to their shareholders.
  • The value of the fund’s shares grows if the value of the fund’s holdings increases but the fund manager does not sell them. You can then profitably sell your mutual fund shares on the open market.

Mutual Funds: Go For It!

Mutual Funds are a Ripoff

Now, in order to scrutinize or analyze the entire idea of mutual funds, one of the most important aspects, aside from its operation, is to examine its pros and cons in depth. In the light of this let’s study what are the pros of investing in Mutual funds –

  1. Simplicity – Mutual funds do not require prior skill or understanding of economics, financial statements, or financial markets to be successful investors. Its investors merely need to understand that mutual funds are investment baskets. Each basket is made up of dozens or hundreds of different assets, such as stocks and bonds. As a consequence, when an investor buys a mutual fund, they’re buying a collection of different financial products.
  2. Expert Investment Management – Asset management Companies (AMCs) or fund houses pool their investments, which are managed by fund managers. These are financial experts with a proven track record of successfully managing investment portfolios. Additionally, fund managers are supported by a team of analysts and professionals who select the best-performing companies and assets with the potential to generate exceptional long-term returns for investors.
  3. Diversification – Mutual funds, unlike stocks, invest in a range of asset classes and securities from a range of companies, allowing you to diversify your portfolio. This also significantly reduces the risk of concentration. If one asset class underperforms, the other asset classes will make up for the shortfall. As a consequence, because their portfolio is well-diversified, investors do not need to be concerned about market volatility.
  4. Low Cost – Mutual funds are a low-cost investment option for small investors. Mutual fund companies and asset management businesses (AMCs) charge a small fee called the expense ratio to manage their clients’ investments. It usually ranges between 0.5 and 1.5 percent of the total amount spent. According to India’s Securities and Exchange Board, the expenditure ratio cannot be less than 2.5 percent (SEB).

Mutual Funds: The Ripoff

Should I get a mutual fund

Even with so many fantastic benefits and a thorough investment procedure, there is still a lingering uncertainty in people’s minds before investing in mutual funds because –

  1. Sales Charges and High Expense Ratio – Mutual fund cost ratios and sales charges can quickly spiral out of control if you don’t pay attention. Investing in funds with expense ratios of more than 1.20 percent should be done with caution, as they are regarded to be on the upper end of the cost spectrum. There are some reputable mutual fund firms that do not charge sales commissions. Fees lower the total return on investment.
  • Misuse of Management Authority – Some fund managers may churn the portfolio needlessly. Portfolio churning refers to the purchasing and selling of equities on a regular basis. Taxes and other charges rise as a result of high portfolio churning. Portfolio returns are lowered as a result of this. Constant churning may cause your fund manager to make bad investing decisions, resulting in significant losses.
  • Tax inefficiency – When it comes to capital gains distributions, mutual fund investors do not have a choice, whether they like it or not. Due to turnover, redemptions, gains, and losses in securities holdings through the year, investors frequently receive distributions from the fund that constitute an inevitable tax event.
  • Over-Diversification – There are benefits and drawbacks to diversification. While it reduces risk, it also dilutes the rewards of investors. It is possible for fund managers to invest in too many asset classes. This is known as over-diversification. To avoid this, investors should do goal-based financial planning prior to investing.

Because of these restrictions or demerits, the breadth of benefits that mutual funds deliver to consumers is limited, and as a result, many have begun to believe that mutual funds are useless when it comes to investing and at the end of the day, any type of investment is preferable to none at all.

Default image
Atharva Aggarwal
Articles: 4

Leave a Reply