Top 5 myths that prevent investors from making the most of mutual funds

Published: February 28, 2018 3:01:26 AM

Individual investors held 51% of the industry’s assets in January 2018 compared to 44.5% a year ago.

mutual funds, five myths, NAV funds, NFOMutual funds have gained a lot of popularity among retail investors.

Mutual funds have gained a lot of popularity among retail investors. Individual investors owned Rs 11.89 lakh crore in mutual fund assets in January 2018, registering a growth of 49.9% over January 2017. Individual investors held 51% of the industry’s assets in January 2018 compared to 44.5% a year ago. Despite the impressive gains, low investor awareness and prevalent mutual fund myths are preventing many investors to get maximum benefit from mutual funds. Here are five mutual fund myths that can prove detrimental for your financial health.

Low NAV funds, NFOs are cheaper

Just as we check the price of product before buying it, many investors check the fund NAVs before investing in them. They wrongly believe that a fund with a lower NAV is cheaper than others. A few investment advisors too perpetrate this myth to promote New Fund Offers (NFOs). A fund’s NAV can be high or low due to various factors.
As the increase or decrease in a fund’s NAV depends on the increase or decrease in the prices of its underlying assets, a fund with better investment portfolio will always register faster growth in its NAVs. Similarly, a newer fund will have lower NAV than much older funds as it had a shorter time to grow.
Instead of using fund NAV as a selection parameter, use funds’ past performances along with their future prospects of beating their benchmark indices and peer funds to select mutual funds.

Dividend declared is a windfall

Mutual fund dividends are often projected as windfall income. However, what many investors do not realise is that the dividend amount is paid out of the investor’s own investment. As a result, a fund’s NAV gets reduced by the dividend amount. Moreover, unlike popular perception, the dividend amount is calculated on your fund’s face value, not the NAV.
For example, if a scheme with an NAV of Rs 40 declares a 20% dividend, it will pay a dividend amount of Rs 2 (20% of Rs 10 face value) and the NAV of that scheme will come down to Rs 38 after the dividend record date. Hence, never invest in a mutual fund dividend scheme with the hope of earning windfall income. Instead, opt for the mutual fund growth option to benefit from the power of compounding.

Need demat account to invest in MF

Other than exchange traded funds, you are free to receive your mutual fund units in your demat account or otherwise. Online mutual fund platforms are as convenient as demat accounts as far as purchasing and redeeming units or accessing statements and other investor services are concerned.

Mutual funds invest in equities only

There are various kinds of mutual funds based on the asset classes they invest in. Among them are debt funds, equity funds, hybrid funds and gold funds. Equity funds primarily invest in equities while debt funds primarily invest in bonds, Commercial Papers, government securities, and Certificate of Deposits of banks. Hybrid funds invest in both equity and debt. Your decision to invest should be based on your risk appetite and the investment horizon of your financial goals.

You need a large sum to invest

Most mutual fund schemes have minimum investment requirements of Rs 5,000 and Rs 500 for lumpsum and SIP investments, respectively. The minimum amount for additional lumpsum investment is usually Rs 1,000.

By: Manish Kothari

The writer is director, Mutual Funds, Paisabazaar.com

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