Myth – 1: Mutual funds are available only for the long term.
Fact: Though investing is always a long-term game, mutual funds are available for a variety of durations, including short, medium, and long term. You may invest in mutual funds for several choices of durations, depending on your needs, whether short, medium, or long term. While liquid and short-term debt funds are appropriate for immediate and medium-term demands, equity funds can be utilized for long-term goals.
Myth – 2: You need a large capital to invest in mutual funds.
Fact: You may start investing in mutual funds with as little as Rs. 500 every month. Many people believe that investing in mutual funds requires a significant amount of money. In actuality, you may invest as little as Rs 500 per month under a systematic investment plan (SIP). Recently, several mutual funds have started offering Micro SIPs with SIP amounts as little as Rs 100. This is intended to attract smaller investors as well, allowing them to participate in mutual funds in lower sums at regular periods.
Myth – 3: Mutual funds invest only in equity market.
Fact: Mutual funds also invest in government securities, bonds, other fixed-income instruments, and metals. Mutual funds fall into several types, including equity, debt, gold, and hybrid. You can invest in them based on your objectives and risk tolerance. If you are a risk-averse investor, you may want to choose a debt fund that invests in government securities, bonds, and other fixed income products. Thus, not all mutual funds invest in stock markets, and you can select a fund based on your risk tolerance and financial goals.
Myth – 4: Mutual Fund investment is risk-free.
Fact: Investing in mutual funds exposes you to a variety of risks, including market risk and liquidity risk. Many investors assume mutual fund investments are risk-free. Nonetheless, historical experience demonstrates that there is risk associated with investing in mutual funds, including debt funds. Some of the most prevalent risks connected with mutual funds are market risk, concentration risk, credit risk, liquidity risk, and so on. These risk factors have the potential to lower your returns from mutual funds. So, you should always keep in mind the risk involved in mutual funds and hence make informed decision while investing in these.
Myth – 5: You need a Dematerialised Account (demat account) to invest in Mutual Funds.
Fact: Except for ETFs, mutual fund investing does not require a demat account. There is no requirement for a Dematerialised Account to invest in mutual funds. It is entirely optional whether you wish to get your mutual fund units in physical or dematerialised form. However, if you wish to invest in exchange traded funds (ETFs), you must have a demat account since ETFs, like stocks, can only be held in demat accounts. All other mutual funds, including closed-ended funds, do not require a demat account to invest in them.
Myth – 6: MF schemes with lower NAV are cheaper and hence likely to generate better returns.
Fact: There is no relationship between NAV and future returns for mutual fund schemes. Another prevalent misunderstanding among investors is that mutual fund schemes with lower NAVs are cheaper and would create higher returns in the future. Their argument is that the possibilities of a 20% increase in NAV from 10 to 12 outnumber the chances of a fund’s NAV increasing from 1000 to 1200. The reality is that a scheme’s NAV is just a weighted aggregate of the market value of the underlying securities held by the fund on any given day. As a result, there is no correlation between a fund’s NAV and its returns.
Myth – 7: Always buy a top rated fund that will give you better returns.
Fact: The rating of mutual fund schemes is based on their past performance, which is not a guarantee of future results. The fund’s ratings are quite dynamic, and a fund that is top ranked one year may not be number one the next year. The fund’s historical performance is reflected in these ratings, which might not hold true going forward. As a result, your investment in mutual funds should be driven by your risk tolerance and overall financial objectives rather than ratings alone. Furthermore, there may be rare cases when these ratings are influenced. So, make an informed investment decision and always use a reliable source of information while analyzing a mutual fund.
