Myths & Facts About Mutual Funds

Mutual funds are one of the most popular investment avenues in India. Being popular comes with its own set of disadvantages. While celebrities have to face rumors, mutual fund have to face misconceptions aka myths. Here are some myths about mutual funds that are busted. Take a look at these.

Myth1: One Needs Large Sum to Invest in Mutual Funds

This is one of the biggest myths mutual funds face. One doesn’t need a large sum of money to invest in mutual funds.

Fact: Start investing in mutual funds with as little as INR 500.

Mutual fund investments can start with just Rs 500 through SIP and a lumpsum investment with Rs 5,000. Also, there is no upper limit to the investment. Hence, one doesn’t have to be rich to invest in mutual funds.

Myth2: One Needs to Have Complete Knowledge About Mutual Funds to Invest

That’s not true.

Fact: Mutual funds are meant for investors who don’t have knowledge about the securities market.

Mutual funds are designed for common investors. Mutual funds are professionally managed by experts. Since there are many mutual funds in the market it might be a little difficult for investors to choose. Also, there are financial advisors who suggest which mutual funds suit each investor. Scripbox is one such advisor. Also, it makes mutual fund investing as easy as online shopping by providing personalized services.

Myth3: Mutual Funds Give Guaranteed Returns

Fact: Mutual funds do not guarantee returns.

Mutual funds have the capability to deliver high returns based on the risk of the funds. But mutual funds do not guarantee returns. Mutual funds are market-linked instruments which are subject to market ups and downs. So expecting them to give guaranteed returns is not reasonable.

Myth4: Invest Just Once and Forget

Fact: Mutual funds are not FD’s where you invest once and forget.

Investing in mutual funds have to be done regularly through SIP if one wants to reap high returns. Hence, investing systematically and regularly is important to fulfill financial goals. Also, investing regularly is not sufficient. Reviewing the portfolio periodically is also as important as investing regularly.

Myth5: Mutual Funds are For Long Term Only

Fact: Mutual funds are for long, medium and short term.

Mutual funds are not just for the long-term. They come in variants for short and medium term too. Mutual funds have debt, equity, and a hybrid of both that come with different maturities. So every investor with short, medium and long durations have funds that suit their horizon and risk appetite.

Myth6: One Needs to Have Demat Account to Invest in Mutual Funds

Fact: One does not need a demat account to hold mutual fund units except for ETFs.

You can hold the units through demat, or directly with the AMC online or through intermediaries like Scripbox. Scripbox is an online platform where one can buy mutual funds based on their financial goals. Also, investing through Scripbox is very easy and convenient.

Myth7: Mutual Funds with Lower NAV are Better

Fact: NAV doesn’t determine which fund is better.

Net Asset Value of a fund represents the market value of assets of the fund per unit and not the market price of all underlying investments. A fund with lower NAV will give more number of units and higher NAV will give less number of units. Buying 100 units in a mutual fund with value Rs 50 is the same as buying 25 units in a mutual fund with a value of Rs 200. Also, the value of the investment will remain the same in both cases, which is Rs 5,000. The number of units will vary and so will the NAV but the initial investment will remain the same.

If the first fund’s NAV increased from Rs 50 to Rs 55 and second fund’s NAV increased from Rs 200 to Rs 220, the gain is the same in both which is 10%. Furthermore, the value after the gain is the same for both the funds at Rs 5,500. Hence a fund cannot be judged based on a higher or lower NAV. Also, there are other factors on which a mutual fund can be evaluated.

Myth8: All Mutual Funds Have Lock-in

Fact: Only ELSS mutual funds have lock in.

All mutual funds do not have a lock in period. Only ELSS mutual funds have a three year lock-in period. Investments in ELSS funds qualify for tax exemption under Section 80C of the Income Tax Act, 1961. Most mutual funds have an exit load. Exit load is the fund’s charge for withdrawing a scheme before a stipulated time period.

Myth9: Debt Mutual Funds are Better Than Equity Mutual Funds

Fact: Debt mutual funds are better for short term, and equity mutual funds are better for long term.

Debt mutual funds invest across fixed income or interest bearing investments. Thus, debt mutual funds offer more or less stable returns. Hence, debt mutual funds are a good alternative to traditional fixed deposit schemes and are suitable for the short term. On the other hand, equity mutual funds invest across stocks. These are market linked instruments and thus are highly volatile in the short term. To average out the impact of market volatility, a long term investment horizon is suitable. Thus, equity mutual funds perform better in the long term.

Myth10: A mutual fund with a high NAV has reached its peak. 

Fact: The NAV of a mutual fund is simply a reflection of the market value of the underlying shares held by the fund. 

Fund managers can choose to buy or sell shares depending on the scheme’s investment strategy. A high NAV does not necessarily mean a fund is expensive and can actually indicate good performance over time. 

Myth11: Buying a top-rated mutual fund ensures better returns. 

Fact: Buying a top-rated mutual fund doesnt necessarily ensure better returns. 

Mutual fund ratings are dynamic and based on performance over time. A top-rated fund may not maintain the same rating in the future. It’s a good first step to shortlist a scheme to invest in, but investment in a mutual fund should be tracked with respect to the scheme’s benchmark to evaluate performance.

Remove the misconceptions you have about mutual funds from your mind. All these are myths about mutual funds are just there to block your way from investing in them. Happy investing!

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