Mutual Fund Myths Debunked
Mutual funds are one of the simplest and hassle free investment option. However there are several mutual funds myths that need to be busted so that investors have more clarity. So let’s get to it.
1. Myth : Lower the NAV the better
Generally the investors are under the assumption that NAV of mutual funds is similar to Stock Price and they think that lower NAV has more growth potential. However in reality NAV is the market value of portfolio. Hence it won’t make any difference in growth of the mutual fund.
For example: The schemes A and B have exactly same portfolio, Scheme A has NAV of 10 and Scheme B has NAV of 150. If the portfolio value increases by 10%, then both scheme A and B will have a new NAV of 11 and 165, i.e. increase in 10% of their NAV. So investor who invests 10,000 in both schemes will get same returns of 11,000.
Hence never buy a fund based on its NAV value rather evaluate its performance through various parameters such as returns, various ratios, fund management etc.
Similarly, though Direct plan (no commission, higher returns) of a fund have higher NAV than their counterpart Regular plan (includes commission, hence lower return) but since no commission is involved, Direct Plans provide better returns (up to 1.5%) than the regular plans.
2. Myth: Mutual funds invest only in the stock market and are not suitable for conservative investors.
People often think that mutual funds are suitable only for aggressive investors and they invest only in shares. This is not true; there are mutual funds to suit every risk appetite. Mutual fund schemes invest in variety of instruments such as shares, gold, debentures, bond, treasury bills etc. Hence investors can pick the Mutual Fund scheme that suits their need, investment horizon and risk appetite.
3. Myth : Buy and forget
One of the common myths associated with mutual funds is that once one have invested in a Mutual Fund, they should forget about it and only check it after say 5-10 years. Nothing can be further from truth. Though it is definitely not advisable to track your investment daily but a periodic review is a must. A periodic review of funds, at least once a year should be done and at that time you may check if the fund is performing according to the expectations, if it is beating its benchmark or not etc. When the fund is not on track corrective actions can be taken.
4. Myth : Mutual funds are only for long term investments
Mutual funds are generally associated with long term investments and while in the long term better returns can be expected from mutual funds (mostly from funds having an Equity element), there are mutual funds available for almost all time horizons. You can invest in a mutual fund for 1 day, 1 week, 1 month, 3 months , an year, 3/5/10 years and so on. For short term investments variety of debt funds are available which are safer than equity investments and can be used for short term goals.
5. Myth : A demat account is needed to invest in Mutual funds
To invest in mutual funds a demat account is not at all necessary, all you need is a PAN card, fill a KYC application along with your first investment cheque and submit it mutual fund AMC office. Alternatively you can also simply invest through our WealthTrust app in a single click.
6. Myth : If markets are high then do not invest in mutual fund
The stock market is cyclical, it will keep having highs & lows but in the long term (10 years or more) the returns have been almost similar despite the market condition at the time of making the investment. Also, it is almost impossible to determine if the market has reached its peak or is at its lowest. Market timing should never be done and if markets are at all time high then the SIP route of investment can be taken to average out the investment risk. Delaying the investment just because it is a bull market is not advisable.10 common mutual funds myths debunked #MutualFundsSahiHai Click To Tweet
7. Myth : Stop SIPs when markets are high
“No one can predict that market has reached its peak. The basic concept behind SIP is to continue investing and not look at market condition. To take benefit of regular investing SIPs should not be stopped until your investment goal is complete.
8. Myth : Large amount is needed to invest in mutual fund
The biggest of all myths is the amount required to invest in mutual funds is huge, whereas in reality you can start investing in mutual fund SIP (Systematic Investment Plan) from a small amount of 500 every month. In order to create wealth it is not must to invest a huge amount; a simple SIP of 500 per month for 30 years will earn you 17.6 Lakhs (at a rate of 12% per annum).
9. Myth : Invest in top star rated funds only
Websites like Value Research, Morningstar, Money Control, CRISIL have a rating for most of the mutual fund schemes. Does that mean that 5 star rated funds will perform better and others won’t; not necessarily. Ratings are based on past performance and as we know that past performance doesn’t guarantee that in future the future performance. A fund that outperforms others today might under perform tomorrow. Ratings are only indicative and other parameters such as your investment horizon, fund objective, portfolio, fund manager’s expertise etc. should be considered before choosing a fund.
10. Myth : NFOs Preferable to Existing Funds
People tend to think that a New Fund Offer (NFO) is cheap since its NAV is only 10 Rs. However, it is always better to invest in a current fund rather to invest in a New Fund Offer (NFO). The reason is that there won’t be any track record of the fund to evaluate the NFO. The NAV of Rs 10 does not mean that the fund is cheaper than other funds of similar genre as said in myth 1. NFO usually comes with higher marketing expenses for some period of time. Hence it’s always better to go with existing funds where you can evaluate the track record.
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New to Mutual Funds? Learn more about basics of mutual funds here.