Investing money in any scheme promising good returns is a reluctant act for many. Peer circle or lack of knowledge due to confusion and myths prevailing around the same prevent people from starting their financial planning.
To start with the many myths associated with mutual fund investment options, the Association of Mutual Funds in India (AMFI) has also busted common myths like mutual funds are for experts or they are only for long term and so on.
AMFI has cleared the doubts for the benefit of the public who are keen to understand the mutual fund market but have some misconceptions.
Established in 1995, AMFI is a non-profit organization and an association of all Asset Management Companies of SEBI-registered Mutual Funds in India.
SEBI is a statutory organization of the government, responsible for regulating the securities and commodity markets in India.
Common Myths and Facts about Mutual Funds;
Myth 1: Mutual funds are for experts
FactMutual Funds are meant for common investors who may lack the knowledge or skill to invest in the securities market. Mutual funds are professionally managed by expert fund managers after extensive market research for the benefit of the investors. A mutual fund is an affordable way for investors to get a full-time professional fund manager to manage their money.
However, investors must read the scheme document before investing and consult in case they have any doubts regarding making an informed decision.
Myth 2: Mutual funds are only for the long term
Fact: Another common myth is that fund investments are only for long term, busting this myth, AMFI says that mutual funds can be for short term or long term depending on one’s investment horizon and objective.
Read also: Confused about the types of mutual funds? What is Equity, Debt or Hybrid Fund; check details
There are different types of Mutual Fund schemes – which invest in different types of securities – equity as well as debt securities which are suitable for different investor needs.
In fact, there are many short-term schemes where you can invest for a period ranging from a few days to a few weeks to a few years, e.g., liquid funds are short duration funds with a portfolio maturity of less than 91 days, Whereas Ultra Short-Term Bond Funds are short term funds with portfolio maturity of less than one year.
There are short-term bond funds which are medium term funds where the underlying portfolio maturity ranges from one year to three years. Then, there are Long-Term Income Funds which are medium to long term funds with portfolio maturity between 3 to 10 years.
While equity schemes are best suited for the long term, debt mutual funds are suitable for investors with a short term (less than 5 years) investment horizon.
Myth 3: Investing in mutual funds is the same as investing in the stock market or mutual funds are an equity product
FactMutual Funds: Invest in the stock market (i.e., equity), bond market (corporate bonds as well as government bonds) and money market instruments such as Treasury Bills, Commercial Papers, Certificate of Deposits, Collateral Borrowing and Lending Obligation (CBLO), etc. Huh. Many of these instruments are not available to retail investors due to the large ticket size of the minimum order quantity (such as G-Secs) and hence, retail investors can participate in such investments through mutual fund schemes.
Also, if you invest in mutual funds, you leave it to an expert, a fund manager, to pave the way for your investment destination. On the other hand, direct investment in shares means, you are managing everything.
Myth 4: You can invest in mutual funds only with a lump sum and a large amount
FactYou do not need a huge amount to invest in mutual funds. In fact, Systematic Investment Plan (SIP) is a popular method by many investors. SIP can be started from just Rs 500 per month.
Read also: SIP or Lump sum? Factors you should consider before investing
One can start investing in Mutual Funds with only Rs.5000 in lumpsum without any upper limit in most of the Mutual Fund schemes and Rs.1000 can be invested for subsequent/additional subscriptions. And for Equity Linked Savings Schemes (ELSS), the minimum amount is as low as ₹ 500.
In other words, it is your decision and choice whether you want to invest in lump sum (lump sum) or build your portfolio gradually with regular monthly investments through SIP.
Myth 5: Mutual funds with lower net asset value (NAV) are better
FactNAV: The NAV of a mutual fund represents the market value of all its underlying investments. The NAV of the fund is irrelevant, as it represents the market value of the fund’s investments and not the market price. Any capital appreciation will depend on the price movement of its underlying securities.
Let us understand this through an example of AMFI;
Suppose, you invest Rs 10,000 each in Scheme A, whose NAV is Rs 20 and Scheme B (whose NAV is Rs 100. You will be allotted 500 units of Scheme A and 100 units of Scheme B. Assuming that Both the schemes have invested their entire corpus in the exact same stock and in the same proportion, if the underlying stocks collectively appreciate by 10%, the NAV of both the schemes should also increase by 10% to Rs.22 and Rs.110 respectively. Thus, in both the scenarios, the value of your investment increases to Rs 11,000. Thus, the current NAV of a fund has no impact on the returns.
Myth 6: You should demat account for mutual fund investment
Fact: It is completely optional to hold the Mutual Fund units in demat mode except for Exchange Traded Funds. For all other schemes including close-ended listed schemes like Fixed Maturity Plans (FMPs), it is entirely up to the investor whether to hold the units in demat mode or in traditional physical accountant statement mode.
Exchange Traded Funds, which trade like a common stock on a stock exchange, unlike regular mutual funds. The units of ETF are usually bought and sold through a registered broker of a recognized stock exchange.
Read also: What is Demat Account? Why do you hold shares of NSDL and CDSL? check details
In simple words, ETFs are funds that track an index like CNX smelly or BSE Sensex, etc. When you buy shares/units of an ETF, you are buying shares/units of a portfolio that tracks the yield and return of its parent index.
Myth 7: A scheme with a high NAV has peaked
Fact: One needs to keep in mind that the NAV of a scheme is nothing but the reflection of the market value of the underlying stocks held by the fund on any given day.
Mutual funds invest in shares, which can be bought or sold as and when deemed fit by the fund manager based on the investment strategy of the scheme (Buy-Hold-Sell). If the fund manager feels that a particular stock has peaked, he can choose to sell it.
High NAV does not mean that the fund is expensive. In fact, higher NAV indicates good performance of the scheme over the years.
Myth 8: Buying top rated mutual fund schemes ensures better returns
Fact: Mutual Fund ratings are dynamic and are based on the performance of the scheme over time – which is itself subject to market fluctuations. Hence, a mutual fund scheme which may be at the top of the rating charts at present, may not necessarily maintain the same rating month after month or at a later date.
However, shortlisting a scheme to invest in a top rated fund is a good first step (though past performance does not guarantee better returns in future). Investment in a Mutual Fund scheme should be tracked periodically to evaluate its performance with respect to the benchmark of the scheme to decide whether to stay invested or exit.
Investors should note that a Mutual Fund Scheme is No One Deposit The product is not affiliated with, or guaranteed by, or insured by the mutual fund or its asset management company. Due to the nature of the underlying investments, the returns or potential returns of a mutual fund product cannot be guaranteed.
Historical performance, when presented, is purely for reference purposes and is not a guarantee of future results.
Mutual funds are subject to market risk. It is advised to read all relevant documents carefully before investing.
read all latest business news Here