Is It Safe To Invest In Mutual Funds In 2024 (2024)

In the category of market-linked securities, mutual funds are a relatively safe investment. There are risks involved but those can be ascertained by conducting proper due diligence.

While research is essential, it cannot guarantee you return in a market as markets are subject to volatilities that are sometimes caused by factors beyond our control – for instance, a pandemic.

However, you can at least keep at bay from bad investments if you know your financial goals, risk tolerance, and track record and future projections of your preferred mutual funds. For instance, factors such as high expense ratio, diluted returns and hidden front and back-end charges are considered negative.

What are Mutual Funds?

A mutual fund is a market-linked pooled investment option managed by a professional money manager. It offers a diverse range of stocks, bonds, or other securities that match the investment objectives stated in the fund’s prospectus.

These funds provide small or individual investors access to professionally managed portfolios.

Additionally, it’s worth noting here that investing in mutual funds can minimize risk when compared with investing in a single stock or bond. Investors earn returns based on the fund’s performance minus any fees or expenses charged.

Why Should You Invest in Mutual Funds?

Mutual fund investments when used right can lead to good returns, keeping risk at a minimum, especially when compared with individual stocks or bonds.

These are especially great for people who are not experts in stock market dynamics as these are run by experienced fund managers.

Mutual funds are a popular investment option that pools money from investors to purchase stocks, bonds, and other securities.

Some of the benefits that investors putting their money in mutual funds enjoy are summarized below:

• They are usually managed by experienced professionals and that reduces the risk of losses an investor can incur
• Investing in mutual funds provides diversification across multiple sectors/assets, reducing the risk of losses due to poor performance in one area
• Mutual funds are regulated by SEBI (Securities and Exchange Board of India), adding a layer of safety via implementing mandatory guidelines and safeguarding policies
• Mutual funds are obligated to disclose their portfolio holdings and performance regularly, ensuring transparency
• Mutual funds are cost-effective due to their low investment and management fees
• Mutual funds have high liquidity, which means that investors can easily buy and sell units without any inconvenience

When are Mutual Funds Considered a Bad Investment?

There are times when a mutual fund may not be a good approach for you as an investor. Usually, this is when the management fee is high. High annual expense ratio, high load charges or high fees paid when an investor buys or sells shares are not good signs.

Mutual funds are also not a good option for people who want to exercise total control over their holdings. This is because the funds are managed by fund managers.

Additionally, it is worth noting here that certain rules and regulations can dilute returns generated.

Returns Dilution: Mutual funds are heavily regulated and cannot have concentrated holdings exceeding 25% of their portfolio. This can lead to diluted returns. However, it can be hard to predict which stock will do well, so most investors prefer mutual funds to diversify their portfolios.

High Annual Expense Ratios: Mutual funds disclose the percentage of annual charges for investors, known as expense ratios. Vanguard reported an industry wide average of 0.54% in 2020. Fees can go as high as 3%. High fees can make mutual funds unattractive as investors can get better returns from broad-market securities or ETFs.

Lack of Control: Mutual funds may not be suitable for investors who want complete control over their portfolios, as they do all the picking and investing work. In addition, many mutual funds may deviate from their stated investment objectives, making them unsuitable for those who prefer consistent portfolios. When choosing a mutual fund, research its investment strategy and the index fund it is tracking for safety.

High Load Charges: Mutual funds have different share classes with front- or back-end loads, which are charged from investors when buying or selling shares. Some back-end loads decrease over time, but many classes of shares charge 12b-1 fees at sale or purchase. Load fees range from 2% to 4% and can reduce returns, making funds unappealing for frequent traders.

Read: Best Investment Options in 2024

How To Invest in Mutual Funds?

Investing in mutual funds today is a fairly simple process that can be completed in a few easy steps.

Step 1: Ensure that you have a brokerage account with sufficient cash on hand and access to mutual fund shares. The account can be opened either online or by visiting your bank or an investment company in person.

Step 2: Identify mutual funds that match your investment goals in terms of risk, returns, fees, and minimum investments. Please note here that many platforms offer fund screening and research tools and this can be a huge help, research-wise.

Step 3: Determine the initial amount you want to invest and submit your trade. You can also set up automatic recurring investments. It’s important to monitor and review the performance of your investments periodically and make adjustments as needed.