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7 Myths about mutual funds

  August 19,2019

7 Mutual Funds Myths That You Should Ignore

Do you want to invest in mutual funds? But you don’t have enough understanding about it or do you think that mutual funds are not for you based on what others have said? Well, don’t worry. We are here to bust some of the myths associated with mutual funds.

Myth #1 – SIP Is An Investment Product

Nowadays, a lot of people assume that the Systematic Investment Plan (SIP) is a different investment product, unrelated to mutual funds. However, it is not true. SIP is just another way to invest in mutual funds. There are two main ways to invest in mutual funds: lumpsum or one-time investment and SIP or regular purchases. In SIP, investors can regularly invest in a fund of their choice. Once the SIP mandate is set up, a predefined amount is automatically deducted from your savings account on a  pre-defined date.

For example, if you have a SIP of Rs 1,000 in Fund A on 10th of every month, then on 10th of each month, Rs 1,000 will be deducted from your bank account and will get invested automatically.

Myth #2 – You Need A Lot Of Money To Invest In Mutual Funds

There is a general misconception that mutual funds are only for people who have a six-figure income and business class people. However, it is entirely false. Many fund houses have made it easier to invest in mutual funds by reducing the minimum investment amount made through lumpsum and the SIP route.  You need Rs.100 to invest through SIP and Rs.1,000 for additional investments.

Myth # 3: Investing In Mutual Funds Means Investing In Stock Market

Mutual funds invest in stock markets. However, there are other categories of mutual funds that don’t invest in the equity markets. Debt mutual funds invest in the bond market (corporate bonds and government bonds) and money market instruments (treasury bills, commercial papers, certificate of deposit, collateral borrowing & lending obligation (CBLO)). The objective of these funds is to protect capital along with stable returns.

Myth #4: You Need To Be An Expert In Mutual Funds

While direct equities are meant for experts, mutual funds meant for everyone. You don’t need to be an expert or have investment knowledge to invest in mutual funds. It is because expert fund managers manage these funds. A strong research and investment team back the fund managers. It is an inexpensive way to get professionals to manage your money.  

Myth #5: You Should Only Invest In Mutual Funds If You Have A Long-Term View

If you want to invest in equity mutual funds, then you need to take a long-term view of more than five years. It is not applicable for all the types of mutual funds. Debt funds especially overnight funds, liquid funds and ultra-short-term funds allow you to park your money for a short period from a day to three months. You can invest in different types of mutual funds based on your investment horizon and objective.

 

Myth #6: Investing In A Top-Rated Mutual Fund Ensures Better Future Returns

Relying solely on the star rating of a mutual fund is a wrong way to predict future returns. The ratings are dynamic and are likely to change. If a fund is rated five stars by various organisations, it does not mean that the fund will deliver better returns than other funds. There have been instances where the value of five-star funds have tumbled due to credit defaults of the invested company.

The best way to track the performance of the fund should be against its benchmark. Evaluate the performance of the mutual funds periodically against the benchmark and other funds in the category to decide whether you should stay invested or not.

Myth #7: It Is Better To Invest In A Fund With A Low Net Asset Value (NAV)

Many investors believe in this myth that investing in a fund with a low unit price (NAV) is better as the appreciation will be more in a fund with low NAV. It is irrelevant because it only represents the market value of the securities held by the fund and inflows from investors. The capital appreciation will depend on the increase in the value of the underlying securities. 

These were the seven popular mutual fund myths. If you want to invest in mutual funds and want to get clarity between myths and facts, a financial advisor will be able to help you with that.

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