Mutual Funds: Myths And Facts Around This Investment Option

Investing money in any scheme that promises good return is a reluctant task for many. Due to confusion and prevailing myths around the same within the peer circle or lack of knowledge prevent people from starting their financial planning.

To begin with, among several myths surrounding mutual funds investment options, Association of Mutual Funds in India (AMFI) has also busted common myths like mutual funds are for experts or they are only for the long term and so on.

AMFI has cleared the doubts for the interest of the public who are willing to understand the mutual fund market, but carry certain misconceptions.

Formed in 1995, AMFI is a non-profit organisation and the association of all the Asset Management Companies of SEBI-registered mutual funds in India.

SEBI is a statutory organisation of the government, responsible for regulating securities and commodity markets in India.

Common myths and the facts about mutual funds;

Myth 1: Mutual funds are for experts

Fact: Mutual funds are meant for common investors who may lack the knowledge or skill set to invest in the securities market. Mutual funds are professionally managed by expert fund managers after extensive market research for the benefit of investors. A mutual fund is an inexpensive way for investors to get a full-time professional fund manager to manage their money.

However, investors must read the scheme document before investing and consult if they have doubts for an informed decision.

Myth 2: Mutual funds are only for the long term

Fact: Another common myth is that the fund investments are only for long term, busting this myth, AMFI says mutual funds can be for the short term or for longer term based on one’s investment horizon and objective.

Also Read: Confused About Mutual Funds Types? What Is Equity, Debt Or Hybrid Funds; Check Details

There are different types of mutual fund schemes – which invest in different types of securities – in equity as well as debt securities that are suitable for different investor needs.

In fact, there are various short-term schemes where you can invest for a few days to a few weeks to a few years e.g., Liquid Funds are low duration funds, with portfolio maturity of less than 91 days, while Ultra short-Term Bond Funds are low duration funds, with portfolio maturity of less than a year.

There are Short-Term Bond Funds which are medium duration funds where the underlying portfolio maturity ranges from one year – three years. Then, there are Long-Term Income Funds which are medium to long duration funds with portfolio maturity between 3 and 10 years.

While Equity Schemes are most suitable for a longer term, debt mutual funds are suitable for investors with a short term (less than 5 years) investment horizon.

Myth 3: Investing in mutual funds is the same as investing in stock market or mutual fund is an equity product

Fact: Mutual funds invest in stock market (i.e., equities), bond market (corporate bonds as well as government bonds) and Money Market instruments such as Treasury Bills, Commercial Papers, Certificate of Deposit, Collateral Borrowing and Lending Obligation (CBLO) etc.. Many of these instruments are not available to retail investors due to large ticket size of minimum order quantity (such as G-Secs) and hence, retail investors could participate in such investments through mutual fund schemes.

Also, if you invest in mutual funds, then you leave it to an expert, a fund manager, to pave the way to your investment destination. On the other hand, directly investing in stocks means, you are the one who is managing everything.

Myth 4: You can only invest in mutual funds with lump sum and large amount

Fact: You don’t need large sums of money to invest in mutual funds. In fact, Systematic Investment Plan (SIP) is a popular method by many investors. SIPs can be started with only Rs 500 per month.

Also Read: SIP Or Lump sum? Factors You Should Consider Before Investing

One could start investing in mutual funds with just Rs 5000 for a lump-sum with no upper limit and Rs 1000 towards subsequent/additional subscription in most of the mutual fund schemes. And for Equity linked Savings Schemes (ELSS), the minimum amount is as low as ₹ 500.

In other words, it is your decision and choice whether you want to make a one-time investment (lump sum) or build your portfolio gradually with regular monthly investments through SIPs.

Myth 5: Mutual funds with a lower Net Asset Value (NAV) are better

Fact: A mutual fund’s NAV represents the market value of all its underlying investments. NAV of a fund is irrelevant, because it represents the market value of the fund’s investments and not the market price. Any capital appreciation will depend on the price movement of its underlying securities.

Let us understand this through an illustration by AMFI;

Suppose, you invest Rs 10,000 each in scheme A whose NAV is Rs 20 and scheme B (whose NAV is say, Rs 100. You will be allotted 500 units of scheme A and 100 units of scheme B. Assuming that both schemes have invested their entire corpus in exactly same stocks and in the same proportions, if the underlying stocks collectively appreciate by 10%, the NAV of the two schemes should also rise by 10%, to Rs 22 and Rs 110, respectively. Thus, in both the scenarios, the value of your investment increases to Rs 11,000. Thus, the current NAV of a fund does not have any impact on the returns.

Myth 6: You need a Demat account for mutual fund investing

Fact: Holding mutual fund units in Demat mode is absolutely optional, except in respect of Exchange Traded Funds. For all other schemes, including the close-ended listed schemes like Fixed Maturity Plans (FMPs), it is entirely up to the investor whether to hold the units in a Demat mode or in conventional physical accountant statement mode.

Exchange Traded Funds, which unlike regular mutual funds trades like a common stock on a stock exchange. The units of an ETF are usually bought and sold through a registered broker of a recognised stock exchange.

Also Read: What Is A Demat Account? Why NSDL And CDSL Hold Your Shares? Check Details

In simple terms, ETFs are funds that track indexes such as CNX Nifty or BSE Sensex, etc. When you buy shares/units of an ETF, you are buying shares/units of a portfolio that tracks the yield and return of its native index.

Myth 7: A scheme with a higher NAV has reached its peak

Fact: One needs to keep in mind that the NAV of a scheme is nothing but a reflection of the market value of the underlying shares held by the fund on any day.

Mutual funds invest in shares, which may be bought or sold whenever deemed appropriate by the Fund Manager depending on the scheme’s investment strategy (Buy-Hold-Sell). If the Fund Manager feels that a particular stock has peaked, he can choose to sell it.

A high NAV does not mean the fund is expensive. In fact, high NAV indicates a good performance of the scheme over the years.

Myth 8: Buying a top-rated mutual fund scheme ensures better returns

Fact: Mutual fund ratings are dynamic and based on performance of the scheme over time – which in itself is subject to market fluctuations. So, a Mutual fund scheme that may be on top of the rating chart currently, may not necessarily maintain the same rating month after month or at a later date.

However, a top rated fund is a good first step to shortlist a scheme to invest in (although past performance does not necessarily guarantee better returns in future). Investment in a mutual fund scheme needs to be tracked with respect to the scheme’s benchmark to evaluate its performance periodically to decide whether to stay invested or to exit.

Investors must note that a mutual fund scheme is NOT a DEPOSIT product and is not an obligation of, or guaranteed, or insured by the mutual fund or its Asset Management Company. Due to the nature of the underlying investments, the returns or the potential returns of a mutual fund product cannot be guaranteed.

Historical performance, when presented, is purely for reference purposes and is not a guarantee of future results.

Mutual funds are subject to market risk. It is advisable to read all related documents carefully before investing.

Read all the Latest Business News here