1. Risk: Mutual funds invest in equity and debt, which are not risk-free investments. Equity mutual funds are subject to market risks, while debt funds carry credit and interest rate risks. It’s essential to understand the fund before investing. However, mutual funds diversify their investments across multiple assets, resulting in lower volatility compared to direct stock investments.

2. Lock-in Period: The Equity Linked Savings Scheme (ELSS) is the only mutual fund type with a lock-in period. ELSS investments come with a three-year lock-in period and offer tax benefits under Section 80C of the Income Tax Act. Investments up to INR 1,50,000 per annum are tax-deductible. However, ELSS has the shortest lock-in period among all investments qualifying for tax exemption under Section 80C.

3. Over-Diversification: It is advisable not to invest in too many mutual funds simultaneously. Over-diversification can lead to diminished returns, as spreading investments too thin may dilute potential gains.