8 Common Myths of Mutual Funds.

1. MYTH: Mutual Funds are only for experts.

Facts:

Mutual funds are designed for average people who lack the information or skill set required to invest in the stock market. For the advantage of investors, mutual funds are properly managed by skilled Fund Managers following significant market research. A mutual fund is a low-cost way for investors to have their money managed by a full-time professional fund manager.

2. MYTH: Investing in Mutual Fund is only for the long-term.

Facts:

Mutual funds can be short-term or long-term, depending on one’s investing horizon and goal. Different types of mutual fund schemes exist, each of which invests in different types of securities, including equity and debt securities, to meet the demands of different investors. You can invest for a few days to a few weeks to a few years in a variety of short-term schemes, such as Liquid Funds, which have a portfolio maturity of fewer than 91 days, and Ultra Short-Term Bond Funds, which have a portfolio maturity of less than a year.

Short-Term Bond Funds are medium-term bond funds with an underlying portfolio maturity ranging from one to three years. On the other hand, Long-Term Income Funds are medium to long-term funds with a portfolio maturity of three to ten years.

While equity schemes are best for long-term investors, debt mutual funds are best for individuals with a short-term investment horizon (less than 5 years).

3. MYTH: Mutual Fund investment is similar to stock market invest or Mutual Fund is an equity product.

Facts:

Mutual funds engage in equities (stocks), bonds (corporate and government bonds), and money market products, including Treasury Bills, Commercial Papers, Certificates of Deposit, Collateral Borrowing & Lending Obligation (CBLO), and so on. Due to huge ticket sizes and minimum purchase quantities (such as G-Secs), many of these products are not available to individual investors; nevertheless, retail investors can participate in such investments through mutual fund schemes.

4. MYTH: A NAV of ten per unit is better than a NAV of twenty-five per unit in a Mutual Fund Scheme (or a Mutual Fund scheme with lower NAV is better, or investing in NFOs is preferable than invsting in existing sxhemes).

Facts:

It is a widespread misunderstanding. The market value of a mutual fund’s underlying investments is represented by its NAV. Because it represents the market worth of the fund’s investments rather than the market price, the NAV of a fund is meaningless. The price movement of its underlying securities will determine any capital appreciation.

Let’s look at an example to better understand:

Suppose, you invest ₹10,000 each in scheme A whose NAV is ₹10, and scheme B (whose NAV is saying ₹100. You will be allotted 1000 units of scheme A and 100 units of scheme B. Assuming that both schemes have invested their entire corpus in exactly the same stocks and in the same proportions if the underlying stocks collectively appreciate by 10%, the NAV of the two schemes should also rise by 10%, to ₹12 and ₹110, respectively. Thus, in both scenarios, the value of your investment increases to ₹ 11,000.

As a result, a fund’s current NAV has no bearing on its returns.

5. MYTH: A large amount of money is required to invest in Mutual Funds.

Facts:

This is completely false. In most mutual fund schemes, one can start investing in mutual funds with just 5000 for a lump-sum / one-time investment with no upper limit and 100 for subsequent/incremental subscriptions. The minimum amount for Equity-linked Savings Schemes (ELSS) is as low as 1000. In fact, with a Systematic Investment Plan (SIP), you can invest as little as 500 each month for as long as you like.

6. MYTH: A demat account is required to invest in Mutual Funds.

Facts:

Except for Exchange Traded Funds, holding mutual fund units in Demat mode is purely optional. It is entirely up to the investor in all other schemes, including closed-ended listed schemes like Fixed Maturity Plans (FMPs), whether to hold the units in a Demat mode or a traditional physical accountant statement format.

7. MYTH: A system with a higher NAV has reached its maximum effectiveness.

Facts:

Because of the general link of Mutual Funds with stocks, this is a common misunderstanding. It’s important to remember that a scheme’s NAV is simply a reflection of the market value of the underlying shares held by the fund on any given day. Mutual funds invest in stocks, which the Fund Manager may buy or sell as needed, depending on the investment plan of the plan (Buy-Hold-Sell). If the Fund Manager believes a stock has reached its high, he can sell it. A high NAV does not imply that the fund is costly. In reality, a high NAV shows that the strategy has performed well over time.

8. MYTH: By buying a highly rated Mutual Fund scheme, you can expect better returns.

Facts:

Ratings for mutual funds are dynamic and based on the scheme’s performance over time, which is susceptible to market volatility. As a result, a mutual fund scheme that is currently at the top of the rating chart may not necessarily hold that position month after month or at a later date. On the other hand, a top-rated fund is a smart place to start when deciding which program to invest in (although past performance does not necessarily guarantee better returns in the future). A mutual fund scheme’s investment must be tracked against its benchmark to regularly evaluate its performance and decide whether to stay invested or depart.

Read Next: “Which Is Better for Investors: A Contra Fund or a Value Fund?”

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