Although many mutual fund myths deter possible investors, mutual funds have grown to be a popular investing option. Many times, these myths cause unwarranted uncertainty that results in lost possibilities.
This article aims to refute these myths about mutual funds by means of mutual fund facts, therefore offering clarity. It will look at 11 typical misconceptions followed by the facts to assist readers in making better judgements regarding mutual fund investments.
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Common myths and facts about mutual funds
Myth 1: Only stock market experts should invest in mutual funds because they are risky
Fact: This is hardly at all true. Mutual funds are meant for consistent investors who might not know much about the markets. Professional fund managers who do extensive market research to guide investing decisions oversee these monies. Investing in a mutual fund is like hiring a competent financial manager to manage your assets for a fraction of the cost of appointing one directly.
As of September 30, 2024, the Association of Mutual Funds (AMFI) recorded 21.05 crore mutual fund accounts—or folios. Of these, mostly driven by retail investors, about 16.82 crore folios were under equity, hybrid, and solution-oriented schemes. Many of these retail investors gain from excellent fund management even though they may lack stock market knowledge.
Also read: Mastering Your investment: A guide to high risk vs low risk mutual funds
Myth 2: To begin investing in mutual funds, you must have a sizable sum
Fact: This is a typical misunderstanding. Actually, you could start investing in mutual funds with as low as ₹5,000 for a lump sum and, most typically, just ₹1,000 for later additions. Starting at just ₹500 a month, the total is significantly less for those using Systematic Investment Plans (SIPs), so mutual funds are rather readily available to all kinds of investors.
Myth 3: Mutual funds are only appropriate for long-term investments
Fact: For objectives involving both short-term and long-term investment, mutual funds offer adaptability. Various time horizons are catered for by several mutual fund varieties. Short-term investments, for example, are best suited for liquid funds and ultra-short-term bond funds; long-term objectives call for equity funds. Whether your investment time is few days, months, years or otherwise, there is a mutual fund strategy for any need.
For example, if you had made ₹10,000 monthly SIP in a particular mutual fund over 18 years and 11 months, your overall investment of ₹22.5 lakhs would have increased to ₹1.12 crore, therefore indicating a long-term investing plan.
If the investment were for only one year, though, it would have increased from ₹1.20 lakh to ₹1.44 lakh. This indicates that depending on the type of fund and time horizon, mutual funds can produce returns over both short-term and long-term intervals.
Myth 4: Mutual funds promise returns
Fact: Though they have great potential for returns, mutual funds do not ensure them. Being market-linked investments, mutual funds’ performance relies on the state of the market. Remember returns are not guaranteed; no mutual fund program can provide predetermined or guaranteed returns.
Myth 5: Investing in mutual funds is similar to making direct stock market investments
Fact: Apart from equities, mutual funds make investments in several asset groups. These could include bonds, government securities, and money market instruments among other things, so offering a varied exposure beyond the stock market. This wide diversification controls risk and qualifies mutual funds for every type of investor.
A balanced mutual fund might allocate half of its holdings to bonds and half to stocks. This balanced blend helps reduce risk; if the stock market suffers, the bonds can offer stability and balance off losses.
Myth 6: Mutual funds with lower NAV are cheaper and better
Fact: This is a typical misinterpretation. A mutual fund’s net asset value (NAV) displays, rather than its price, the current market value of its owned assets. A smaller NAV does not suggest a better or less expensive fund. The value development of the underlying assets controls the performance of your investment independent of the starting NAV at which you buy the units.
Assume, for instance, that you spend ₹10,000 on two mutual funds—Fund A with a NAV of ₹20 and Fund B with a NAV of ₹100. You would get one hundred units of Fund B and 500 units of Fund A.
Fund A’s NAV will rise to ₹22 and Fund B’s to ₹110 should each fund exhibit a 10% rise in their underlying assets. In both scenarios your investment increases to ₹11,000, demonstrating that the growth of the underlying assets determines your returns rather than the original NAV.
Myth 7: Investing in mutual funds requires a demat account
Fact: Demat form mutual fund holding is optional. Investing in mutual funds other than exchange-traded funds (ETFs) does not call for a Demat account. For most investors, the conventional approach—physical statements—is more practical than any other strategy.
Myth 8: A high NAV means the fund has reached its peak
Fact: Navigating a fund’s underlying assets rather than its performance potential, NAV shows their current value. A high NAV does not imply the fund is expensive. Actually, it could indicate that the fund has performed well over time. Should the fund management spot stocks that have peaked, they can be sold to generate gains, therefore, guaranteeing the fund’s ongoing growth.
Myth 9: Top-rated mutual funds will always deliver higher returns
Fact: Although highly regarded mutual funds are worth looking at, they may not guarantee consistent outstanding results. Different ratings depend on the performance of a scheme, which relates to the state of the market. Although prior performance might offer direction, it’s important to routinely monitor your mutual fund to make sure it fits your financial objectives.
Myth 10: SIP is only for small investors
Fact: SIPs give freedom to invest bigger sums too, not just little quantities. Starting a SIP with ₹500 is free from the upper limit. If you would want to invest more consistently, SIPs fit all kinds of investors—big and small.
Also read: SIP investment: Your path to wealth building
Myth 11: Investing in mutual funds requires extensive paperwork
Fact: Investment in mutual funds calls for less documentation. All you have to do is finish a one-time KYC (Know Your Customer) procedure, which intermediaries registered under SEBI would help you to perform quickly. Once finished, you are free to invest in several funds without further documentation for every transaction.
Bottomline
Both new and experienced investors would find great value in mutual funds. Still, the rumours about mutual funds can cause unwarranted doubt. Understanding the facts and dispelling these myths helps investors make wise decisions consistent with their financial objectives.
Mutual funds have a variety of options whether your goals are short-term liquidity, long-term gain, or consistent income. It’s time to go past the legends and investigate mutual funds with clarity and conviction.
FAQs
What is the biggest problem with mutual funds?
The management fees and expenses of mutual funds create the most issues since they over time can reduce returns. Furthermore, investors have little influence over the investment choices of the fund and can incur capital gains taxes resulting from trading activity. Furthermore affecting mutual fund performance is market volatility, which makes return prediction difficult. Notwithstanding these problems, mutual funds continue to be a popular choice for diversity.
Are mutual funds 100% safe?
Mutual funds are not absolutely safe, though. They run market risks including swings in bond and stock prices. Although diversification helps to lower risk, it cannot totally eliminate it. Furthermore influencing returns are management fees and expenses that mutual funds pay for. Before making a mutual fund investment, investors should give their risk tolerance and investment objectives great thought.
Is a mutual fund better than an FD?
Fixed deposits (FDs) and mutual funds help for different reasons. Though they carry more risk, mutual funds provide possibly better returns through market investing. Though generally with fewer returns, FDs are safer since they offer guaranteed returns with lesser risk. Your financial goals and risk tolerance will determine your options. Mutual funds have more development potential; FDs are better for security and certain returns.
Can I withdraw a mutual fund anytime?
Yes, you are free to leave a mutual fund at any moment, although there can be restrictions. Closed-ended funds have a lock-in period; open-ended funds let withdrawals at any time. Early withdrawals could have penalties or exit loads. Review the specific agreements and consider any likely taxes or fees before pulling out of your mutual fund.
What is the full form of SIP?
SIP stands for Systematic Investment Plan. It’s a method for routinely making a specific mutual fund investment. By allowing investors to purchase units at several market levels, SIPs help to average out the cost over time. This systematic method lessens the effect of market volatility and permits wealth to be steadily built. Popular for their simplicity and future for long-term expansion are SIPs.
