Most Common Myths About MF Investing Busted
There has been a spectacular increase in mutual fund investments in the last few years. The domestic MF AUMs have grown five-and-half times in the last 10 years. The AUMs have increased from `4.13 lakh crore at the end of 2008 to `22.86 lakh crore at the end of 2018. This growth has given rise to various myths that are hindering the potential growth of MF investments in India. This article aims to clear the misconceptions generally associated with investments in mutual funds and place the true facts for the benefit of the investors.
Myth: Mutual funds are only for the long term
Fact: Mutual funds are available in all durations, including short term, medium term and long term
You can invest in mutual funds with various durations according to your needs, be it short term, medium term or long term. While liquid and short-term debt funds are suitable for short and medium-term requirements, equity funds can be used for your long-term needs.
Myth: One needs a large sum to invest in mutual funds
Fact: You can start investment with an amount as low as `500 per month
It is common perception among a large section of investors that they need a huge amount of money to invest in mutual funds. In reality, you can invest as low as `500 per month via systematic investment plan (SIP) and `5,000 through the lump sum mode.
Myth: Mutual funds invest only in equity market
Fact: Mutual funds invest even in government securities, bonds and other fixed income securities
There are various categories of mutual funds, including equity, debt and hybrid. You can invest in them according to your needs and risk appetite. So, if you are a risk-averse investor, you may opt for a debt fund which invests in government securities, bonds and other fixed income instruments. There are even mutual funds that invest in gold. All mutual funds do not invest in equity markets and you can choose a fund keeping in mind your risk appetite and financial goal.
Myth: Mutual fund investment is risk-free
Fact: Investment in mutual fund involves various kinds of risks, including market risk, liquidity risk, etc.
Many investors believe that mutual fund investment is risk-free. However, last year's experience shows that risk is involved while investing in MF even in debt funds. Some of the most common risks associated with investing in MFs are market risk, concentration risk, credit risk, liquidity risk, etc. These risks can adversely impact your returns.
Myth: You need a dematerialised account to invest in mutual funds
Fact: Except for ETFs, you do not need demat account to invest in mutual funds
There is absolutely no need to have a dematerialised account to invest in mutual funds. You have the option to choose whether to receive your units as a physical statement or in a dematerialised electronic mode. However, if you want to invest in an exchange traded fund (ETF), you need to have a demat account as ETF is held only in a demat account. For all other schemes, including close-ended funds and other listed funds, you do not need to have a demat account.
Myth: MF schemes with lower NAV are cheaper and hence likely to generate better returns
Fact: There is no relation between NAV and future returns of MF schemes
There is yet another common misconception among investors that MF schemes with lower NAVs are cheaper and generate better returns than schemes with higher NAVs. Their assumption is that the possibility of a fund's NAV moving up from `10 to `12, that is moving up by 20%, is higher than another fund’s NAV moving up from `1000 to `1200. The reality, however, is that NAV of a scheme is nothing but weighted aggregation of the market value of the underlying shares held by the fund on any day.
Myth: Always buy a top rated fund as it gives you better returns
Fact: Ratings of MF schemes depend on their past performance, which does not guarantee future returns
The ratings of the fund are very dynamic and a fund which is top rated this year may not maintain its numero uno position next year. These ratings are reflection of the fund's past performance, which may not continue in future. Hence, your investment should be guided by your risk appetite and overall financial goals rather than ratings alone.