Introduction
This year is a celebration for mutual funds. India’s mutual fund industry witnessed its Assets Under Management (AUM) reach ₹75.61 Lakh Cr in September 2025- a jump of 12.7% on a year-on-year basis. Yes, this shows investors are being lured into this easy and flexible investment tool. But wait, there could be a different side to it?
Mutual funds are not all shiny and glamorous; they do carry red flags. This blog lays out how mutual funds’ advantages fare against their disadvantages, comparing ideal scenarios and not-so-ideal ones! By the end of this, you could understand if a mutual fund is good or bad.
Mutual Funds—Good or Bad?
Mutual funds have their perks and boons. Carefully assessing each of its pros and cons helps investors understand their suitability. Basically, mutual funds are neither bad nor good. Instead, they are suitable for some while not feasible for others, depending on their investment goals and risk tolerance.
When Mutual Funds Are a Smart Choice
Let’s explore in this section when mutual funds are considered a smart choice for investment, by looking at the major benefits of mutual funds.
Professional Management & Expertise
Fund managers with specialised professional knowledge manage mutual funds. Unlike individual equity investing, where an investor has to conduct research and analysis on the stock on their own, mutual funds offer this service included in the investment. Mutual funds appoint fund managers who are reputed, experienced, and hold significant knowledge of the financial markets. The role of mutual fund managers is to apply their knowledge by researching market trends and accordingly taking investment decisions, keeping in mind the best interests of the investors. This expert supervision ensures that mutual funds cater to investors’ goals in the right manner.
Diversification & Reduced Risk
Mutual funds spread investors’ resources across different assets, industries, geographies, and other diverse segments. This helps in controlling risk and exposure to any particular asset. This is based on a simple premise: Don’t put all your eggs in one basket. Diversification into different asset classes mitigates risk of the overall portfolio.
Liquidity, Accessibility & SIP Affordability
Another benefit of mutual funds is the liquid nature of this asset class. Mutual fund units can be transacted at your convenience. The process of purchase and redemption is simple and easily accessible. Applications and websites that act as brokers and facilitators of mutual fund transactions exist, which provide users with the ease of the whole process.
The feature of Systematic Investment Plan (SIP) is another crucial benefit of mutual funds. SIPs allow investors to participate in the mutual fund scheme at low costs, sometimes as low as ₹100/month. The SIP convenience offers investors the benefits of compounding and rupee cost averaging, which works its magic over a long time period. Be it a small investment amount or a large one, SIP investments are known to create wealth over time.
Transparency & Economies of Scale
Mutual funds regularly disclose the Net Asset Value (NAV) of their units at the end of each trading day. This is the fair price of each unit of the mutual fund. Purchase and redemptions take place at the applicable NAV of the day.
Additionally, mutual funds also publish monthly fact sheets that provide details of the fund’s holdings, key ratios, and current as well as historical performance. These insights help investors assess the performance of mutual funds and keep track of their portfolios. These features promote transparency and accountability for investors.
Mutual funds also offer economies of scale by pooling multiple investors’ resources and investing in the same portfolio of assets. This scales down the overall cost of managing the fund, which is, in reality, divided amongst all participants. Since large amounts are collectively invested across various securities, the brokerage, transaction, and administrative costs are distributed among all investors, resulting in a lower expense ratio per investor.
Passive Funds: Low-Cost, Long-Term Strategy
Passive funds are the mutual funds that seek to replicate the performance of the market index they track. Since they do not seek to beat the market, the expenses associated with them are negligible. Despite their low-key approach, passive funds are often the preferred choice for conservative investors aiming for optimal returns based on lower risk. In 2024 alone, 76 index funds and 41 Exchange Traded Funds (ETFs) were introduced to Indian investors, shedding light on their growing confidence in this category.
The simplicity, ease, and low-cost structure help investors opt for a long-term strategy when investing in passive funds.
Situations Where Mutual Funds May Fall Short
While the perks of investing in mutual funds are many, some concerns should be addressed.
Fees, Charges & Expense Ratios
Mutual funds come with additional charges and expenses. Let’s have a look at the different expenses associated with mutual funds.
| Type of Cost | What It Means | When It’s Charged | Typical Range / Example | Impact on Investor |
| Expense Ratio | The fee charged to maintain and manage the fund (includes fund management, administration, and distribution expenses). | Deducted on a daily basis from the fund’s assets; reflected in the NAV. | Generally between 0.5%–2.5% per year. Passive funds have lower expense ratios. | Reduces overall returns slightly, as it’s an ongoing cost. |
| Exit Load | The applicable charge is levied on investors when they redeem their units before a certain time period. | Charged only during early redemptions. | Typically ranges from 0.5%–1% if withdrawn within 6–12 months (varies by scheme). | Encourages investors to invest for the long-term. |
| Additional Charges | Other small costs like transaction charges, stamp duty, or switching fees between schemes. | Applied at the time of purchase, switch, or redemption. | For instance, a ₹100–₹150 transaction fee may apply if the investment exceeds ₹10,000. | Small but adds up over time; best to review the fund’s offer document. |
These expenses may hinder the returns associated with the mutual fund.
Market & Manager Risk, Potential Underperformance
Mutual funds face market risk, the risk of loss in the fund’s returns due to the overall economic situation affecting the financial markets. Any disruptions in the market can reduce the fund’s portfolio value. This risk cannot be fully eliminated despite diversification.
Additionally, fund managers also bring an element of risk to the fund. Suppose the fund manager is not as efficient as expected; their investment decisions can significantly impact the fund’s returns. In fact, even in favourable circumstances, the fund manager may not be able to generate the expected potential returns. This could impact the performance of the fund.
Over-Diversification & Complexity
Too much spreading across securities can dilute the returns of the portfolio. The inclusion of similar stocks, sectors, or geographies can lead to overdiversification. This can increase the number of stocks in the portfolio but may result in the portfolio responding less effectively. In fact, a highly diversified portfolio can lead to higher transaction costs and complexities.
Let’s look at an example.
A large-cap fund holding 70 related or similar stocks may be less efficient than another large-cap fund holding 25 well-diversified stocks. Suppose Fund A holds 70 stocks within the technology, banking, and finance sectors. Fund B holds 25 stocks spread across healthcare, FMCG, Industrial products, banking, and agricultural sectors. While Fund A holds more stocks, Fund B is better diversified and protected against market volatility as it covers industries that are not too interrelated.
Tax Inefficiencies
Mutual funds are often tax-inefficient because investors are taxed on capital gains and income distributions even if they haven’t sold their units. Frequent portfolio trades and dividend payouts can trigger taxable events, reducing overall post-tax returns- especially for investors in higher tax brackets. In fact, when mutual funds distribute their net gains as dividends, shareholders must pay taxes on this as well. This tax inefficiency remains unavoidable for investors.
Real-World Trends & Investor Behavior
Are you in two minds regarding mutual funds? Let me quickly give you some real-world trends about mutual funds in India.
- As stated before, the AUM of the mutual fund industry in India reached a record high level of ₹75.61 Lakh Crores in September 2025, recording a 12.7% y-o-y return.
- As of June 2025, India’s mutual fund industry manages ₹74.41 trillion ($895 billion) in assets – a figure larger than the combined GDPs of Pakistan and Bangladesh, showcasing the country’s powerful financial awakening.
- Recently, a SEBI survey revealed that mutual funds and ETFs now surpass stocks in investor awareness, marking a major shift in India’s investment landscape despite the mutual fund industry’s relatively young history.
How to Decide: Good or Bad for You?
You can consider if investing in a mutual fund works for you or not. Follow these steps to tick off your checklist.
- Understand your financial objectives: Different investors invest for different reasons and goals. For example, a young investor aged 20 years may be investing to buy a house in 10 years. Another investor who is 45 years old may be investing for retirement. So, first, understand your goals.
- Build your risk tolerance level: It is crucial to understand how much risk you are willing to take to determine if mutual funds are good for you. Note that mutual funds come with risk, and if you are an extremely conservative investor, investment options like fixed deposits may be more suitable.
- Analyse mutual fund’s performance: Always ensure thorough research of the mutual fund to determine if the fund has delivered consistent returns as per your risk profile and investment objectives.
Conclusion
Mutual funds have their own advantages and disadvantages that can hamper an investor’s decision to invest. Advantages like diversification, professional management, transparency, liquidity, and other benefits make mutual funds suitable for investors. Beware of extra fees, charges, overdiversification, tax inefficiencies, and others that can reduce its suitability for investors.
FAQs
Mutual funds are an easy, convenient, and long-term wealth building tool for investors. Mutual funds are neither good nor bad, they are suitable for different types of investors, while infeasible for others.
Mutual funds are risky due to factors like: fees and charges, manager and market risk, over-diversification, and tax inefficiencies. These factors are an inherent part of mutual funds, and investors may not be able to ignore them.
Yes, if the fees are too high, mutual funds’s expenses can reduce your overall returns. Expense ratios, exit loads, and other charges add up over time. However, if the fund performs well and delivers higher returns than the costs, the benefits usually outweigh the fees.
It depends on your goals and risk appetite. Active funds are managed by experts who aim to beat the market but charge higher fees. Passive funds, like index funds, simply track a market index at lower costs. For most investors, passive funds offer steady and cost-effective returns.
Mutual funds can be tax-efficient depending on the type. Equity Linked Savings Schemes (ELSS) offer tax deductions under Section 80C. Long-term capital gains are taxed at lower rates, making them more efficient than short-term investments. Choosing the right fund and holding it longer can help save taxes.
Yes, mutual funds spread investments across many sectors and assets, reducing the impact of a single underperforming stock. This diversification helps lower risk and stabilises returns. Even with small investments, investors can enjoy exposure to a wide range of companies and industries.
