There are many misconceptions revolving around mutual funds, which sometimes prevent investors from exploring this investment instrument.
Mutual funds are one of the great instruments for creating wealth. Still, there are many misconceptions revolving around them, which sometimes prevent investors from exploring this investment instrument. Here we are going to bust some of such myths in a bid to help investors get a clear picture.
1. Past determines the future
Everyone who tends to invest in mutual funds first looks at the historic performance of the fund and then decides to invest. Therefore, “we can clearly say everyone feels the future performance will be linked to the previous performance and fall in line. However, if the future was based on the past, every analyst would have made money thick and fast, which is clearly a myth,” says Abhinav Angirish, MD, Abchlor Investment Advisors Pvt Ltd.
2. The lower the NAV, the cheaper is my fund
It is commonly believed that when a NAV (net asset value) is lower, the fund is cheaper and hence will provide higher returns. However, NAV is nothing but the current market value of the portfolio. The older the fund, the higher is the NAV as the market value grows over a period of time.
3. The investment has to be for long term
When someone suggests someone a mutual fund, the first reaction what a person gives is that it is a ‘long-term’ investment. “The fact is it’s apparently good if you invest for a very long term, as you reap the benefits of compounding, but one who needs money sooner can also invest with a view of getting a better return than other asset classes. There are multiple types of schemes to choose from that suit different types of investors,” says Angirish.
4. You require a large amount to invest
A common myth among investors is one must have a large amount to invest in a mutual fund, but the ground reality is that you can start in investing in a fund with as small as Rs 500.
5. Mutual fund investment is free from tax
There is a common belief among investors that every investment that they make in a mutual fund are tax exempt, which becomes the easiest selling point for a mutual fund. The truth is only mutual fund investments which are subject to equity are tax exempt under Section 80C.
6. One needs to catch the market lows to start the mutual fund cash flows
Many investors wait for a big market correction to enter the market which usually comes once in 7 years. Following this practice they never tend to invest and lose out on great buying opportunities. In the market, the most important thing is the time, not the timing. “If you are investing for a long term through Systematic Investment Plans (SIP), i.e. investing a small amount at regular intervals for a number of years, your investments will reap the benefit of rupee cost averaging, i.e. buying more units when price is low and buying lesser units when price is high by investing the same amount every time. This will always give you a upper hand in the market,” informs Angirish.
7. One can choose one’s own customized bits and bites
There is a common myth that you can customize your portfolio, ie., you can add or subtract a particular stock from a fund if you want, which is clearly not true as this feature is only available in PMS and is outside the scope of mutual funds.
8. Investing in mutual fund is similar to investing in stock markets
People generally believe that investing in mutual funds is indifferent from investing in a stock market directly. This is far from reality as mutual funds are of various types, which has portfolios in all kinds of mixes with assets including debts, shares, bonds etc.
9. Mutual fund is risk free
A majority of investors feel that mutual fund investment is risk free, but that is not the case. That is the reason why regulators have made it compulsory for fund managers to inform their clients about the risks of investment.
10.Only high-rated funds are safe
People believe that the fund which has the highest ratings are safe & secure and will give the best returns. “The truth is mutual fund ratings are dynamic and are based on performance of the fund at that given point. So, a fund that is rated highly today may not necessarily remain highly rated tomorrow and it also doesn’t guarantee a better performance going forward,” says Angirish.