Mutual Funds Myths Busted

Mutual Fund investments are gaining more interest among investors as the interest offered by Fixed Deposits is at its low. Most of the first time investors may have a lot of questions and misconceptions. This may be because they don't understand the product completely. They lack complete understanding because they don't have complete information about the product. In this post, i will try to clear some of the common myths and misconceptions.

1. Unsuitable for Beginners

Anyone can start investing in Mutual Funds. Investing in mutual funds is as easy as investing in fixed deposits. You can buy and redeem the units at the ease of your home. Every Mutual Fund has a fund manager which are experts in their area. Start with an SIP in a Mutual Fund and leave it to the fund manager. You may need to review the performance of Mutual Fund to check if it is performing as per expectation or not.

2. You need to be an expert

Many people don't invest in Mutual Funds because they don't have much knowledge To invest in Mutual Funds you don't need to be an expert. In fact, mutual funds are best suited to people who don't understand stock market and want to get decent returns. You need to make your regular investment and fund manager chooses stocks and decide when to sell or buy them.

3. You need large sum to invest

This is a common misconception that you need few millions or thousands of money to invest and become rich. Reality is you can start a SIP with as low as Rs 500. Invest regularly and increase your investment as your salary increases. So, don't avoid investing because you are earning low. Regular and disciplined investment can help you to build a large corpus.

4. Mutual Funds invest only in shares (equities)

Each individual has different risk appetite and different goals. Similarly, there are different mutual funds available in market to cater different needs of individuals. There are mutual funds that invests in equities. For low risk investor there are funds that invest in government securities, bonds and fixed income instruments. There are funds that invest in gold. What i want to say is, all mutual funds does not invest in equities, you can choose a fund as per your risk appetite.

5. You need a Demat account to invest

What is needed to invest in mutual funds is a bank account. It is not mandatory to have a demat account to invest in mutual funds. For first time investors, you need to fill "Know your customer (KYC)" form along with supported documents and submit at mutual fund office. Once your KYC is done, you can buy or redeem units using your bank account.

 6. You need multiple KYC for different mutual funds

KYC (Know your customer) is a one time process and can be completed through a broker or any mutual fund office. KYC for banks and mutual funds is different. To open account with different banks or same bank you need to submit documents everytime but for mutual funds you need not to submit your KYC documents if you are already complaint. Complete the process once and invest in any mutual fund online or offline.

7.  You need to time you mutual fund investments

If anyone says that he knows the trick to time the market, he may trying to trick you for his benefit. Don't fall in the trap. Nobody can predict how market will behave tomorrow. Just like regular and sincere work pays off in real life, in long term. Similar approach works with mutual funds also. Be regular and disciplined with your investments and this will always pay off in long term. Stay focused on your financial goals and ignore the noise.

8. Mutual Funds with low NAV gives higher returns

This is a common misconception among investors. Mutual funds sales person often exploit this misconception. You need to understand that it is completely wrong. Lets say fund A has a NAV of Rs 100 and Fund B has a NAV of Rs 10. If  both mutual fund gives a return of 20% then the NAV of Fund A will become Rs 120 and that of Fund B will become Rs 12. Though the NAV of Fund B has increased by Rs 2 and that of Fund A by Rs 20, amount invested by you in either fund will give you same return i.e. 20%. Rs 1000 invested in either fund will have a value of Rs 1200. Its always the percentage that matters not the absolute value.

9. Choose funds on past year performance 

Past performance has been a common criteria to choose mutual funds. A good performing fund today may or may not perform consistently in future. Every fund has ups and downs. So, looking at the past performance of one year doesn't give much information about fund. You must analyze the performance of 5 years or more to choose the fund. It may happen Fund A has given 50% return and Fund B has given 30% return in last one year. One year performance should not be the deciding factor. You need to analyze funds across market cycles (bull and bear cycles) and for longer duration, 5 - 10 years or even more.

10. Dividend option is better than Growth option

Performance of a fund is measured by its growth in NAV (Net Asset Value) and not by the dividend shared. If you opt for dividend option then a part of profit is shared to you after deducting taxes, which is subtracted from its NAV. If you have chosen growth option then your profits are retained in the form of higher NAV. What a investor misses is that those dividends are paid to investor after deducting 28.875% tax at the source. An investor should opt for Growth option to take advantage of compounding. The net annualized returns in Mutual Fund investment will be lower in dividend option compared to Growth option.

11. More Mutual Funds means more diversification

Just you are investing in more Mutual Funds doesn't mean your portfolio is diversified. A mutual fund invests in 50-100 stocks. If you are investing in 3-4 large cap fund then there is a high probability that underlying stocks are also overlapping to some extent. To diversify your portfolio you need to choose one fund from each category - Debt Fund, Large cap, mid cap and small cap. It may happen that buying more funds can reduce your overall returns. So, don't invest in 10-20 mutual funds, rather keep your portfolio limited to each category of funds.

12. Mutual Funds does not need monitoring

"I have started SIP for 10 years and now I can relax". This notion is completely wrong. You need to periodically monitor and review your portfolio. If you don't have time then review it at least once in a year. You just need to check whether it is able to beat its benchmark or not. If it continuously beating its benchmark then you need not to worry. This doesn't take much time. If it is not able to beat its benchmark then you can review it performance again after 3-6 months. At this time you can decide whether you want to keep it or throw it. Remember no mutual fund is risk free.


You can clear your misconceptions by commenting below. I will try to answer it in best possible way.

Happy Investing!!!!