Mutual funds are a vehicle for long-term wealth creation. Despite an operational history of close to three decades and regular advertisements from Association of Mutual Fund in India (AMFI), people still harbour some misconceptions about investing in mutual funds.
Read on and we will help you debunk 10 common myths about mutual fund investments.
MYTH 1: You need a lot of money to start investing in Mutual Funds
REALITY: Mutual funds are investment vehicles for everyone – you could be a high networth individual or may have just started earning. You can invest in mutual funds with as little as Rs 500. You could also begin a Systematic Investment Plan (SIP) with a similar monthly investment. Investing in mutual funds regularly can help you compound your money and build a large corpus.
MYTH 2: Mutual funds are risky
REALITY: Many investors assume mutual fund schemes to be risky. But this is not the case. Depending on its investment mandate, a fund manager would invest in stocks, bonds, gold or a mix of these asset classes. Even in the case of an equity fund investing all its money in stocks, there is little likelihood of risk. This is because mutual funds have a diversified portfolio across stocks and sectors and the risks from individual stocks average out.
MYTH 3: An SIP eliminates all risks
REALITY: Investing in an SIP is not only convenient, it also gives the advantage of averaging over a period of time. If you have been investing in an equity scheme through an SIP, you can expect healthy risk-adjusted returns in the long-term. But an SIP does not completely eliminate the risk of low returns if you exit in a down cycle. However, if you remain invested for the long-term and the market rebounds, then you make money. The SIP also does not address the risk of relative underperformance of a scheme to its benchmark or to its peers.
MYTH 4: You must understand stock market
REALITY: Though some mutual fund schemes invest in stocks, there is no need to understand how to pick stocks or how the markets work. Rather mutual funds work for those who either do not have the skill-set or the time to select stocks and build portfolios. You can also avail services of a mutual fund distributor or registered investment advisor to invest in a mutual fund scheme.
MYTH 5: Mutual funds guarantee returns
REALITY: Mutual fund schemes invest in stocks, bonds or gold depending on the investment objective of a scheme. A scheme’s performance depends on how the scheme’s portfolio performs. Returns are not guaranteed, but, in the long-term, the fund manager is mandated to make money for you. You could also do away with the fund manager’s risk by investing in an index fund wherever possible. Over the long term, most asset classes do well and reward patient investors with decent returns.
MYTH 6: Mutual funds cannot be multi-baggers
REALITY: One way of making money in stock markets is to buy stocks which are multibaggers- a company whose share price grows multi-fold. Mutual fund schemes are perceived to be slow movers since they hold a portfolio of stocks and not all stocks held in a portfolio can be multibaggers.
However, in the real world, not all stocks picked by individuals grow to become multibaggers. Also, many old schemes over the last couple of decades have seen their net asset value (NAV) grow multi-fold.
MYTH 7: NAV matters
REALITY: A high NAV is often assumed to equal a high return potential by some investors. Though high NAV is an outcome of past performance built over a time, it is no guarantee of a better tomorrow. As Warren Buffet once remarked, “The investor of today does not profit from yesterday’s growth”.
Some investors also assume that a low NAV means the price per unit is less. However, that is not the case. A scheme starting its investment journey is typically priced at Rs 10 at the time of the New Fund Offer (NFO). At any given moment in time, a low-NAV scheme and a high-NAV scheme invest in the same market. And, their returns are impacted in a similar fashion by market movements. The choice of securities the fund invests in, can cause their returns to differ over a period of time. But, a low NAV does not mean the scheme is priced cheaply.
Mutual fund units are allocated based on the realisation of funds by a mutual fund house before the cut-off time. Some equity investors worry that by missing a day or two they may lose out. But, for the long-term investors, it really makes little sense to be too focused on a particular day’s NAV. If you are regularly investing in equity funds for the long-term, a day’s delay or so for operational reasons does not have a major impact on your total returns.
MYTH 8: Mutual funds only work in the long term
REALITY: Though mutual funds work best in the long-term, there are mutual fund schemes that suit short-term investors as well. Overnight funds and liquid funds are a great option to park funds for a short term. Meanwhile, investments in short duration funds or banking & PSU bond funds could be rewarding for medium-term investors.
MYTH 9: Invest & forget in mutual funds
REALITY: Investors often put their money in a mutual fund scheme and do not review their investments. They assume that over a period of time, these investments will grow into a large corpus. However, this may not be a prudent approach. It is better to review your investments regularly. You should also review your asset allocation in the light of your changing financial goals and risk appetite. Over a period of time, you may need to take corrective actions. Though you should allow long-term compounding to create wealth for you, it is better to keep reviewing your investment portfolio from time to time.
MYTH 10: Redeem after the lock-in period is over
REALITY: Equity linked saving schemes (ELSS), which are popularly known as tax saving schemes, entail a lock-in period of three years. There is a tendency to sell units of mutual funds after their lock-in or high exit-load period is over. You should not do this. You can hold on to them and let them compound. Each time you redeem, you may have to pay tax. If the scheme is doing well, you can hold on to it.