Equity markets are something which is not liked by many people not because they hate it rather due to their lack of knowledge about the equity markets and that is where equity mutual funds can come in handy as equity mutual funds refer to those mutual funds which invest a major chunk of their capital into equity shares of the listed companies and are riskier as compared to debt mutual funds. In order to understand more about this term, one should look at some of the advantages and disadvantages of equity mutual funds –
Advantages of Equity Mutual Funds
Good Return over Long Period of Time
The first and foremost advantage of equity mutual funds is that they offer superior returns over a long period of time when one compares the return with other options like bank fixed deposits or debt mutual funds. In simple words, if you have money and patience then you should park money into these mutual funds for at least 10 to 20 years and then only you will be able to reap the benefits of superior return as compared to return from other asset class.
Liquidity
Another benefit of this fund is that they offer good liquidity implying that investor can sell all his or her holdings immediately if he or she is in need of funds as these funds are actively traded and therefore provides ample opportunity to the investor to exit from these mutual funds whenever the need for funds arises.
Less Stress
Equity markets look very attractive but they are very stressful because of constant uncertainty and hence it is not a walk in the park even for an experienced trader or investor but when it comes to equity mutual funds since you do not know where the fund manager has invested your money there is no stress as the only thing you have to do is to invest the monthly amount into the scheme and all stress related to your investment will be of the fund manager and not yours.
Disadvantages of Equity Mutual Funds
Risky
The biggest drawback of mutual funds is that they are inherently risky because the underlying that is equity markets in which they invest the funds are risky in nature and that is the reason why people who are risk-averse and believe in fixed return should skip the equity mutual funds. In simple words, if you have this mindset of not taking any risk rather remain happy with a lower fixed return than equity mutual funds are not your cup of tea.
Lack of Control
Another problem with equity mutual fund is that one does not have any control over the investment as once you deposit money into mutual funds than the allocation of the funds into various stocks is made by the fund manager and you do not have any say in the selection of stocks thus all the control rests with the fund manager and not with you. In simple words just like while driving a car when you place your kid in your lap and allow the kid to place hands on the steering and the kids think that he or she is driving the car but truth is that you are in control in the same way in case of equity mutual funds although the funds are yours but the control over those funds is not yours but that of the fund manager.
High Fees
Equity mutual fund investment is not free rather there are fund management fees or charges which have to be paid by the subscriber of the fund and hence unlike fixed deposits which have no charges or debt mutual funds which have negligible fees equity mutual funds have high fees and hence can be a limiting factor when it comes to investors choice for the investment of their funds.
As one can see from the above that equity mutual funds have pros as well as cons and that is the reason why any individual before investing their funds into equity mutual funds should read the above points carefully and depending on his or her own risk appetite should take the decision regarding their investment into these mutual funds.