One of the best and most practical ways to invest money despite the abundance of investment options is surely through mutual fund. The best part being your money is in the safe hands of professional fund managers. They do extensive market research, so they can provide you with high-quality investment advice.
Mutual funds offer investors the opportunity to diversify their holdings, which can enhance their portfolios’ overall performance.
Being a popular investment comes with its unique set of drawbacks. One of the biggest challenges in becoming a successful investor is overcoming unfounded myths. Here are some myths we have debunked for you.
1. Myth: Mutual funds are designed only for experienced investors.
Fact: Mutual funds are aimed at ordinary investors who lack the knowledge and expertise to invest in the securities market. Mutual funds are professionally managed by professional fund managers after extensive market research for the benefit of investors. Mutual funds are an affordable way for investors to have a professional fund manager manage their money.
2. Myth: A scheme with a lower NAV or investing in NFOs is preferable to investing in existing schemes, as it offers greater potential for growth.
Fact: This is a very common misconception. A mutual fund’s “NAV” (or “net asset value”) represents the market value of all its underlying investments. The NAV of a fund is not particularly relevant, as it reflects the market value of the fund’s investments, not the market price. Capital appreciation will depend on the price movement of the underlying securities.
For example, you invest Rs 10,000 each in Scheme A, whose NAV is Rs 20, and Scheme B (whose NAV is Rs 100, for example). 500 units of Scheme A and 100 units of Scheme B will be allocated. Assuming that both schemes have invested their entire group in exactly the same stocks and in the same proportions if the underlying stocks collectively rise by 10%, then the NAV of the two schemes must also rise by 10%, to Rs 22 and Rs 110, Straight. Therefore, in both scenarios, the investment value increases to Rs 11,000. The current NAV of a fund has no impact on the returns.
3. Myth: To invest in a mutual fund, one needs a large amount of money.
Fact: That is incorrect. You could start investing in mutual funds with just ₹ 5000 for a lump-sum or one-time investment with no upper limit and ₹ 1000 towards subsequent or additional subscriptions in most of the mutual fund schemes. You can invest your money in a systematic investment plan (SIP) with as little as ₹ 500. You can keep investing until you want to stop, as long as you want.
4. Myth: To invest in a mutual funds, you need a Demat account
Fact: There is no requirement to hold mutual fund units in Demat mode, except for Exchange Traded Funds. For all other schemes, including closed-listed schemes such as Fixed Maturity Plans (FMPs), it is entirely up to the investor whether to hold the units in Demat mode or in the traditional physical accountant statement mode.
5. Myth: Mutual fund investments are meant for the long term.
Fact: Mutual funds can be short-term or long-term, depending on one’s investment horizon and goals. There are different types of mutual funds that invest in different types of securities. Equity mutual funds invest in stocks, while debt mutual funds invest in bonds. Investors can choose which type of fund is best for them based on their investment needs.
While equity schemes are more suitable for investors with a longer investment horizon, debt mutual funds are good for investors with a shorter investment horizon (less than 3 years).
6. Myth: The mutual fund with a higher NAV has reached its peak.
Fact: Many people believe that mutual funds are just like shares and that they are subject to the same risks. This is not always the case, though. Mutual funds are actually a type of investment that can provide you with a lot of benefits. It is important to remember that a fund’s NAV merely reflects the market value of the underlying shares held by the fund on any given day.
Mutual funds invest in shares that can be bought or sold whenever it deems appropriate by fund managers depending on the investment strategy of the system (buy-hold-sell). If the Fund Manager thinks a particular stock is overvalued, he can sell it.
A high NAV does not always mean a high-priced fund. In fact, a high NAV indicates the good performance of the scheme over the years.
7. Myth: Investing in the mutual fund is similar to investing in the stock market / mutual funds are equity products.
Fact: Mutual funds invest in the stock market (i.e. equity), and the bond market (corporate bonds as well as government bonds). Bonds) and Money Market Instruments such as Treasury Bills, Commercial Papers, Certificates of Deposit, Collateral Borrowing & Lending Obligation (CBLO) etc G-Secs) and thus retail investors could participate in such investments through mutual funds.
8. Myth: Buying a top-rated mutual fund scheme guarantees better returns.
Fact: Mutual fund ratings are dynamic, which means that they are based on how the fund has performed over time. This is always subject to market fluctuations. Mutual fund schemes that currently have high ratings may not always maintain those rating month-by-month or over a longer period of time. However, a scheme with a high rating is a good place to start when looking for an investment. Mutual fund investments should be tracked against the fund’s benchmark to evaluate their performance periodically to decide whether to stay invested or to exit.
Conclusion
Steering clear of mutual fund myths is necessary for making informed investment decisions. Now that we have busted some myths, you can connect with your Mutual fund distributor for the investment journey with mutual funds. They can help with realistic financial goal roadmaps. Mutual Fund investments are subject to market risks, read all scheme related documents carefully
