Do you invest in Mutual Fund?? Yes – Great, that’s the best way to build long term wealth. No – Probably you are arrested by decades-old mutual fund myths.
According to Investopedia “A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.”
Mutual funds are now extremely popular and major sources of investment. The campaign “mutual fund Sahi hai” has not only increased awareness but also demand.
Yet there are lots of mutual fund myths, that need to be broken and investors be educated.
When you as an investor would not be having enough knowledge you tend to rely on others’ judgment. The same goes for mutual investment.
When you would try to get meaningful information all you would be getting information either incorrect or negative, due to which you have lots of mutual fund myths.
In this article, I shall try to break the top 25 mutual fund myths.
Mutual fund Myths 1 – It’s necessary to have Demat account
No, this is not the case.
You as an investor has the choice to receive units in mutual funds either in physical or Demat form. Though the convenience is high in Demat form that’s not the compulsion.
You can buy mutual funds via distributor or broker or via directly from the fund house. Previously Demat was necessary to but now you can trade mutual fund on the exchange without having Demat account.
Myth 2 – Know Your Customer (KYC) Is Needed Multiple Times
KYC is a mandatory one time process and it’s mandatory. You must follow before investing in mutual funds.
It’s a verification and needs to be submitted, you need to provide Pan card, Adhar card, a cancelled cheque for the same.
You can get the same done via fund house, bank, or intermediary or broker. These days there is a paperless process that makes the job much easier and fast.
Myth 3 – You need a lot of money to invest
There’s a false narrative being built on mutual fund investment that you need to have a large amount of money. You also start feeling that in order to create huge wealth you need to invest a big amount.
On the contrary, you can start investing in mutual funds via the SIP (systematic investment plan) route. You can start your investment with as low as 500 Rs per month.
A modest sum of just 500 Rs over a period of 20 years at a 12% rate of return can translate into 5 Lacs.
Myth 4 – Can’t switch from one mutual fund to another fund
Many investor have this misconception that they need to sell their units to have different funds. This is one of most talked about mutual fund myths as you can simply move your fund from one scheme to another.
Currently, you can switch with-in fund house only, meaning if you are having HDFC fund then you can move your fund easily from one HDFC fund to another, but you cannot move out fund to let say ICICI.
Currently, only one platform i.e NJ wealth is giving this flexibility to move from one fund to another of the different fund houses.
Myth 5 – Investing in best performing schemes give better returns
There are high chances that you select a mutual fund scheme based on past performance. As the disclaimed in mutual fund offer document reads “ past performance does not guarantee of future”.
Even though funds must have been giving consistent returns over a period of time still the same can not be taken as a formula for future return.
You need to understand the process to spot the best performing fund.
Myth 6 – Mutual Funds Invests Only in Equities
There is a myth that mutual funds invest in equity and equity relates securities only. You believe that’s the reason mutual funds are tagged as risky.
The fact is that the mutual funds invest not only in equities but also in debt instruments. Broadly you would find three types of Mutual Funds
Equity funds are risky debt are the least risk, the hybrid is somewhat between the two.
Myth 7 – Cannot invest in both Debt and Equity
This is among the biggest mutual fund myths that you cannot invest in both debt and equity. You have a notion that funds can be either debit or equity and their no category.
The fact is in today’s time there are numerous kinds of und catering to different kinds of investors.
As per reports 44, AMC’s have more than 5000 + mutual fund schemes. You can select the one based on your need, requirement, and goals. You can also select based on time available and your risk appetite.
Myth 8 – You can add or subtract stocks anytime
There’s a myth that you can customize your Mutual fund. You have a belief that you can direct the fund manager to add and subtract some of the stocks.
The hard truth is that you don’t have any control over the composition of the mutual funds.
The best you can do is select mutual funds based on the objective as stated in the mutual fund document.
Its fund manager prerogative to buy or sell any stock in the fund, and he is free to do so as long as that complies with the broader objective.
Myth 9 You can’t save tax under 80C in mutual funds
Many investors are not aware of the fact that they can claim tax rebate under section 80©. You can claim rebate up to 1,50,000 Rs.
In order to claim a tax rebate, you need to invest in a special kind of mutual fund. They are known as ELSS (Equity linked saving scheme). In these types of mutual funds, there is a lock-in period of three years, i.e you cannot take out money before three years.
Myth 10 – Mutual Funds are for Long Term Investments
If you have been thinking that investment in mutual funds is only for the long term, you need to have your facts correct.
There has been a notion created that mutual fund means long term. Yes, it’s true that you would get an excellent return if you stay committed for a long period.
It’s also true that mutual funds are available in various duration, so you can have based on your requirement.
If you want mutual funds for the short term, there are plenty of them. If you want mutual fund for medium-term also, there is huge options available.
You can invest in the mutual funds for as short as 1 day also.
Myth 11 – Mutual funds are only for experts
It’s a plain myth, rather mutual funds are being managed by experts. The mutual funds are designed in such a way that any kind of investor can have his investment.
You need not have expert knowledge about the subject to invest in mutual funds. That’s why it stated that if you want to access the stock market and don’t want to take risk, mutual funds are the best route.
Mutual funds invest in number of stock maintaining diversification, hence you need not be expert while investing in mutual funds.
Also, there are fund managers to care about investment.
Myth – 12 Trends will always repeat
You might be having a belief and confidence that what has happened in the past is going to happen in the future.
You consider the trend is going to be repeated again and again. That’s why you try to invest in funds which have given good returns in the past.
Though past results are good indicators of the future, they are not guaranteed. There are a lot many other factors that need to be taken into consideration before selecting the best.
Myth 13 – You can only invest in domestic markets
There are a variety of mutual funds available in the market. Some of the mutual funds focus on international markets also.
So if you have that notion that investing in mutual funds means investing Indian companies, you need to have the same corrected.
With the help of mutual funds, you can invest in companies like Apple Inc, Facebook, and Alphabet without spending a dollar.
Apart from this, there are country-specific funds also. You need to invest just like you invest in any other mutual funds. You also need to invest in INR.
Myth 14 – SIP is always better than Lump sum investments
As far as returns are concerned than none of them is better than others. Lump-sum performs better in certain conditions and SIP performs better in certain.
The only difference between these two methods of investing is convenience.
SIP which is monthly commitment sounds more convenient as compared to making an investment in one go.
Also, the fluctuation in the Lump-sum would be much higher as compared to SIP.
Nonetheless, both method caters to a different segment of investors.
Over a long period of time, the difference between SIP and the lump sum is not huge.
Myth 15 – Mutual Funds with lower NAV will deliver higher returns
Another common mutual fund myths – Low NAV shall deliver higher value. The low NAV definitely gives a higher number of units but that doesn’t guarantee higher returns.
There is a difference between the number of higher units and higher NAV.
The investor is of a view that low NAV has to rise and they would be benefitted from that.
The investor considers it’s easy for a NAV to rise from 10 to 12 to register a 20% gain than rising from 1000 to 1200 to register the same gain.
Investor tends to forget that mutual fund investment is not a mathematical calculation but a logical investment.
Myth 16 – Dividend option is better compared to Growth option
Investor are inclined to dividend mutual fund for primarily two reasons
- Lower NAV
- Regular cash flow.
Even though the investors have a tendency to opt for the dividend option to maintain cash flow, that doesn’t qualify them to be better than the growth option.
The NAV of dividend option is always less than growth for the very reason you keep on getting regular cash flow.
Generally, the value of NAV would fall on the payment of dividends.
You as an investor should always opt for growth option to take benefit of compounding.
Myth – 17 Once SIP starts it doesn’t stops
There is a myth that in the case while subscribing for mutual fund you have opted for some time period let’s say 20 years than you would not be able to exit before the expiry of 20 years.
Investors compare the mutual fund’s investment with the loan EMI. They forget that the loan is EMI and cannot be stopped but the mutual fund is an asset. A mutual fund can be stopped anytime, as per the need of investors.
There’s no penalty or charges if the mutual fund has been stopped in between. I would attract charge sonly when you surrender before the lapse of one year.
Myth 18 Mutual fund planning is one time exercise
Investors consider that Mutual fund investing is a one-time exercise. They consider if they have identified some goals and earmarked some mutual, they need not check the status before the arrival of the goal.
Ideally, a mutual fund investment should be evaluated six monthly. It’s not necessary that the fund which is doing good would keep on maintaining their ranks.
Regular evaluation helps you in screening out the bad funds and inducting the new ones.
Myth 20 – Money lost if mutual fund’s company goes bankrupt
That’s absolutely a myth.
Mutual funds are highly regulated and secured. It’s being governed by SEBI and tough norms need to be followed with regular reporting.
The chances of you losing money due to some scam or fund house going bankrupt are almost impossible.
Your investment in mutual funds doesn’t lie with fund house but rather with the custodian.
Fund houses act as a mediator in placing the fund at right place.
Myth 21 – I need not review my portfolio
It’s a common myth that once you have started investing in mutual funds, you need not review the same. You have the notion that the fund manager would be the best person to take calls on your behalf.
That’s a myth as your goal and fund managers’ goal are different.
It’s very much possible that market condition changes, your goal might get changed, and based on that you need to change the overall portfolio.
Ideally, you should have your portfolio reviewed yearly if not half-yearly. You can always hire a qualified wealth manager to have the same done.
Myth 22 – Mutual funds means Stock Market
This is one of the most common myths. Investors consider Mutual fund and stock market synonyms. They consider whatever money would be invested, would route to the stock market only.
However, this is not true.
The mutual fund invests in other categories also, like debt funds. There are specific debt funds also, which has nothing to do with the stock market.
The debt fund invests in bonds, govt securities, and other safe investments.
Debt funds have their own risks and even returns are not stable. Debt funds are highly stable when it comes to returns and often provide better tax-adjusted returns than most of the fixed deposits offered by banks.
Myth 23 – SIP shouldn’t be started when market is high
SIP or systematic investment plan is a way of investment in which a preset sum of money would be automatically invested in the chosen fund.
This is one of the best and preferred methods of investment as it needs no human intervention.
There’s a common myth that you shouldn’t start a SIP when the market is high.
This is not true, SIP works on the principal of averaging. When you start investing in SIP some of the units would be purchased at a high price and some would be purchased at a low price, thus averaging the value of the unit.
This principle of average makes the investment of SIP as a safe investment.
That’s why it’s stated there’s no right to invest SIP, you can start anytime.
Myth 24 – Too Young to Start Investing
There’s a myth that you should not invest in mutual funds, till you reach a certain level of income or age.
The fact is that you can start investing in mutual funds anytime and with as low as 500 Rs.
On the contrary, it’s advised that you should start investing early so that you can create a good corpus.
A simple investment of 500 Rs per month @ 15% rate of return can accumulate to a whopping 1.62 crores. So the sooner you start the better it is.
Myth 25 – There’s entry and exit cost
This is yet another myth that an investor has. Investor beliefs that whenever they start investing in the mutual fund they have to pay some charges and also when they would exit.
The fact is that there are no charges when you start investing in mutual funds. Your consultant might charge you, but that’s the consultancy fee you are paying to him.
Also, there would not be any charges if you exit after one year, in case you wish to exit before one year you need to pay 1% charges and also short term capital gain tax (if any)
The cost structure of a mutual fund is very simple and transparent, all you need to pay is fund management charges. The charges vary from 1% to 2.5% depending on the fund.
I hope that the above-mentioned points have shed some light on myths that were there for mutual funds. Its essential to read and be informed before investing. Educating yourself with the right information is the best way to prepare for investment.
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