Mutual funds are gaining popularity over the past few years. Retail investors are increasingly participating in mutual funds. There is a more significant level of misinformation and myths about mutual fund investment in the regular investors' minds and the typical mutual fund myths often mentioned below:
Myth 1: "Mutual funds mean equities."
Fact: Mutual Funds are like vehicles carrying any investment product. A mutual fund scheme's underlying investments can be debt, equities, money market instruments, or a combination of these. The fact is mutual funds offer schemes in all of these categories.
Mutual Funds have different schemes. Equity or growth fund invests in equity stocks, debt funds into debt products like government bonds, corporate debentures, and treasury bills. Balanced funds in equity and debt, Money market or Liquid Funds, invest in short-term debt instruments. Thus, mutual funds are not just equities, but it also offers many choices to suit varied needs.
Myth 2: "Invest in direct equity than mutual funds."
Fact: Investing directly in equities requires adequate capital, proper research, and time. Investors end up investing in a few companies without thorough research. Mutual Fund helps the investor invest in several equities with the same amount of capital that offers diversification, managed by the professional fund manager, and the research team makes investment decisions. So, it is wiser to invest in mutual funds than direct equity.
Myth 3: "Mutual funds are hazardous."
Fact: Mutual funds can’t promise guaranteed returns to the investor. One should understand that the risk is depending on the scheme and duration. Risk can be reduced by choosing the right asset class for the right duration. The risk of a debt scheme will be lesser compared to a sector or small-cap equity scheme. Investing by Systematic Investment Plan (SIP) further reduces the risk. A mutual fund scheme reduces the risk by diversification into multiple asset classes compared to direct investing.
Myth 4: "Mutual funds do not give good returns."
Fact: The underlying asset class should be similar while comparing the performance of products with relevant benchmarks. Historically, mutual fund schemes have generated huge returns and outperformed market indices in the past. This can be seen from the average returns of diversified equity schemes, as a group, which is at 23.58% in 10 years as compared to the Sensex, which has given 11% (as of 24/02/2021). (Source: Internal). Also, read our article, "Mutual Fund SIPs for Wealth Creation.”
Myth 5: "Better to invest in the mutual fund with the low NAV than high NAV."
Fact:
There is no difference in returns when investing in a higher or a lower NAV of a mutual fund scheme. The NAV of 100 and 10 at 10% return will move to 110 and 11. Thus, a lower NAV or higher NAV doesn't matter while investing between two mutual fund schemes.
Myth 6: "Better to invest in a mutual fund that gives good dividends."
Fact: While investing in a mutual fund, investors can choose between the growth or dividend reinvestment or dividend payout option. It is not mandatory for mutual funds to pay dividends regularly. There will be no difference in the returns of growth and dividend reinvestment option of mutual fund equity schemes. The NAV will increase for the growth option, the number of units will increase for the dividend reinvestment option. If there is a need for liquidity, an investor can choose the dividend payout option.
Myth 7: "Funds will be locked if I invested in mutual funds."
Fact: There will be no lock-in period for an open-ended scheme. ELSS (Equity Linked Savings Scheme) will be having a lock-in period of 3 years as they offer tax savings under section 80C. Close-ended funds can’t be sold at AMC, but one can be sold in on the stock exchange if it is listed there.
Myth 8: Can’t invest in mutual funds online."
Fact: One can make online transactions in mutual funds on a stock exchange trading platform and be held in a Demat account and transact with your trading account. With growing awareness of online routes' benefits, investors find it easier to manage investments by online mode.
Myth 9: "SIP is a scheme."
Fact: SIP is not a mutual fund scheme. It is a way of investing in a mutual fund scheme. SIP investors can invest at regular intervals, a specific amount, for a specified period in a specific mutual fund scheme. Also, read our article "Mutual Fund SIPs for Wealth Creation.”
SIPs help to invest a small amount, as low as Rs.500, regularly in schemes and accumulating considerable wealth in the long term.
Myth 10: " Start SIP when the market falls."
Fact: SIP can be started at any time. By starting a SIP, the investment will be made at the average market price over a more extended period.
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Mutual fund investments are subject to market risk. Read the scheme-related documents carefully.