11 Most Common Mutual Fund Myths and Facts
Last Updated on June 22, 2021 by Chitale CFS Pvt Ltd
Most common mutual fund myths usually affect your plans to invest in mutual funds. Whenever you are about to make any investment decision in mutual funds, it is influenced by some of the information that you have collected from internet or some other sources over time about mutual fund investment.
These common mutual fund myths become the main hurdles in your mutual fund investment decisions and you miss out on many good investment opportunities. Sometimes you also make wrong investment decisions due to these mutual fund myths.
So to have a great financial plan and to achieve your financial goals that you have set for your life leading to creation of steady wealth for you and your family, you should be free from all myths about mutual fund investments. Here is a list of most common myths about mutual funds:
Mutual Fund Myths 1: I need to invest a huge sum of money in mutual funds!
You can start mutual fund investment with as low as Rs.500! In fact the idea behind Systematic Investment Plan (SIP) is to give investors, an opportunity to make little but regular investments. As time passes, you can increase your investment size depending on your investment appetite and financial goals. So investing a huge sum of money in mutual funds is a big myth. You financial planner can source some good plans for you so that you can start with little amount and then gradually move to increase your portfolio size.
Mutual Fun Myths 2: I can invest in mutual funds for long term investment goals only!
You can invest in both short as well as long term mutual funds depending on your investment objectives. There are various short term schemes available in mutual fund arena ranging from few weeks to few years. For example, you can invest in liquid funds or ultra short term funds ranging from one to three years horizon. It is important to note that equity schemes are the ones which are most suitable for long term financial goals while debt funds are made for those investors who are interested in short term investment goals.
Mutual Fund Myths 3: Investing in mutual funds is equal to investing in stock market!
Mutual fund companies invest your money in variety of asset classes including but not limited to share market, bonds, treasury bills, gold etc so investing in mutual fund is not at all same as investing in stock market. The main advantage of these type of investments is that the majority of the retail investors cannot afford to invest in these types of investment instruments due to large value of minimum order threshold. So mutual fund companies pool your fund to invest in these instruments for diversification benefits.
Mutual Fund Myths 4: Mutual fund investments are only for expert investors!
Mutual fund investment is actually a boon for all those who have little knowledge of financial market. That is why it is always advisable by financial advisors to start your investment journey with mutual fund investments. If you are planning to invest on your own, you may put your portfolio in risk due to little knowledge about where to invest.
On the other hand, mutual fund investments are managed by experienced fund managers as well as expert financial analysts on your behalf. If you want to learn more about your investment portfolio at any time, financial advisors are always there to guide you with transparency which does not apply to individual investors (investing on their own) who have little knowledge about financial markets.
Mutual fund Myths 5: I am too young to start investment in mutual funds!
The thumb rule of investment is, the earlier you start your investment, the bigger wealth you can accumulate over a period of time so it is always advisable to start your investment as early as possible. The main advantage of investing early is the power of compounding. The earlier you start investing in mutual funds, greater are the chances to multiply the investment with the power of compounding where your capital gains are reinvested in the portfolio again to get higher returns.
Mutual Fund Myths 6: I don’t need a plan for my retirement at all!
Many young investors think that planning for retirement is a complete waste of time and money. They think they will accumulate good wealth till the old age and it would be sufficient enough to take care of all their expenses at that time. But that’s the biggest mistake you could ever make while making your investment decisions.
You do not consider the inflation rate and most importantly you ignore the medical expenses which will eat up your savings. Also there are other expenses like travelling or pursuing your passion which you could not do earlier as you did not have time etc but what if you do not have enough money to do this? What if you are not on a pension plan? For all this you need to carefully choose the investment products right now by considering retirement planning. It is important to start investment at this moment to take care of all your future needs.
Mutual Fund Myths 7: I should not invest in a scheme which has higher NAV!
Net Asset Value (NAV) of a mutual fund is just an element to measure the fund’s unit value at a given time. It indicates the value of each mutual fund unit. It may increase or decrease as per fund’s performance but it should not be considered as only factor to invest in mutual funds.
To make investment decisions, one should carefully look at other parameters such as past performance of the mutual fund, experience of fund managers, sectors where fund is being invested etc. Hence your mutual fund investment decision should never be influenced by NAV. Please note that old funds might have a higher NAV than young funds as it grows along with the market value.
Another interesting thing which is related to NAV is that people tend to invest in lower NAV schemes so that they can purchase higher units. For example, people think that mutual fund scheme with NAV of Rs.500 will give lower returns as compared to scheme with Rs. 50 NAV as it is easy for a lower NAV scheme to reach from Rs.50 to Rs.60 mark (20% returns) than a Rs. 500 NAV scheme to reach Rs.600 for same returns (20%).
Mutual Fund Myths 8: Only top rated schemes give higher returns in mutual funds!
You might have read a statement disclosed by every mutual fund company which says “past performance may or may not be sustained in future”. It means that despite of the higher performance earlier by the scheme, you might not be able to see the same results in future. The top rated funds will not always give you the best returns as the performance of a mutual fund is always dynamic.
Hence the fund with an excellent record in past may underperform in future so although top ratings can give you a rough picture about past performances of a mutual fund, it is not the best indicator of higher returns in future and should not be a base for your mutual fund investment decisions. It is always advisable to consult your financial advisor before investing in mutual funds.
Mutual Fund Myths 9: Mutual Fund and SIP are two different things!
Mutual fund is a financial instrument through which an investor can invest in variety of asset classes with the help of Asset Management Companies whereas SIP (systematic investment plan) is a method of investment in mutual funds.
In mutual fund investments, fund managers invest a pool of money collected by investors across various asset classes to achieve a common financial objective while SIP helps an investor to make regular investments to reduce the risk and gain relatively higher returns.
You can invest in mutual funds by paying a lump sum and purchase the mutual fund units at one go or you can systematically divide your fund to make regular investments for reducing the risk from market fluctuations. For example, you can invest Rs. 24,000 directly in mutual funds at one go or you can divide your investment in 12 equal parts for 12 months and invest Rs.2000 every month via SIP route to achieve rupee cost averaging.
Mutual Fund Myths 10: I need to have a DEMAT account to invest in mutual funds!
It is not mandatory to have Demat account to invest in mutual funds however you can hold your mutual fund units in your Demat account. It is entirely up to the investor whether to hold his or her mutual fund units in Demat account or through traditional mode where you are directly investing your money through financial advisors. According to AMFI, holding mutual fund investment in Demat account is absolutely optional.
Mutual Fund Myths 11: I do not need a mutual fund distributor to invest in mutual funds!
Honestly every person hates to spend money on any activity which he or she can do. But this idea does not fit while making your mutual fund investment decisions as you have little knowledge about the funds and returns.
It is always best to discuss your investment goals with the mutual fund distributor before making any investment in mutual funds. If you are planning to invest in mutual funds, it is always best to choose regular mutual funds over direct mutual funds as you experience ease of investment through expert guidance through regular mutual fund schemes.
A mutual fund distributor can do more than just investing your money like balancing your portfolio during market ups and downs etc. When you do not have time to check your portfolio, a mutual fund distributor can monitor it and keep a track of your investment plans. The best part is that the mutual fund distributor like Chitale Financial Solutions is always available to answer you!
There are few myths and actual facts about mutual fund investments. Kindly consult the mutual fund distributor before making any investment decision.
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Chitale Financial Solutions offers wide variety of investment avenues for short as well as long term investment needs. With more than 30+ years of experience, we are one stop solution for a number of financial products like Mutual Funds, Insurance, Bonds, Fixed Deposits etc. We serve our clients with highest standard of transparency and integrity by putting investor’s interest first.
Mutual fund investments are subject to market risks. Please read the offer document carefully before investing