People are sometimes apprehensive about opting for mutual funds because of the myths surrounding it. This article attempts to break the wrong notions associated with mutual funds so that potential investors can realize the full benefits of such investments.
When we don’t have enough knowledge about a particular matter, we end up relying on what others have to say. And when it involves matters of money, a simple error in judgement can prove to be a costly mistake. Coming to mutual funds, there are a whole lot of rumours floating about. These, often negative, but ultimately inaccurate information has limited a whole bunch of people from becoming financially independent. In this article, we will look to debunk seven of the top myths surrounding mutual fund investments.
Myth 1 - You can only invest for the long term
Fact - The duration of investment actually comes down to the category of fund, and the period can differ from short term, medium term and long term. Mutual fund investments can be as short as a few days and can go up to a couple of years. Liquid and short-term debt funds are examples of short and medium-term investments, while equity funds are labelled as long-term investments.
Myth 2 - Funds that have higher NAV are better than those with lower NAV
Fact - There have been many instances where people have assumed high NAV to mean high returns. That is not necessarily true. NAV represents the intrinsic worth of a fund. It acts as a tool for measuring performance and is not in itself a performance indicator. Additionally, with time, NAV increases and therefore older funds tend to have higher NAVs when compared with a relatively younger scheme.
Myth 3 - Buying a top-rated fund ensures better returns
Fact - A four or five-star rating is not a sure-shot guarantee that a particular fund will perform well. The ratings are dynamic and are on the basis of the scheme's performance over time. So, a scheme that is at the top of the rating chart right now, may not necessarily hold the same rating the following month. Identifying a top-rated fund, however, can be the first step in shortlisting schemes to invest in. Parking money in mutual funds should be tracked with regards to the scheme’s benchmark to assess its performance periodically and determine whether one needs to stay invested or exit.
Myth 4 - Demat account is necessary for mutual fund investments
Fact - Stocks sold via exchanges have to compulsorily be held in the Demat format. However, this is not the case for mutual funds. Investors in mutual funds can choose to receive the units either as a physical statement or dematerialised form. One can buy mutual funds via a distributor, directly from the website of a fund house or through a broker on stock exchanges. Previously, to buy through an exchange, a Demat account was necessary. But now, an investor can transact in mutual funds on exchanges (through a registered adviser or a broker) without opening a Demat account.
Myth 5 - I won’t be able to stop SIPs once I start it
Fact - People who tend to believe this are mistaking SIPs to function similarly to EMIs that they pay on loan. It is necessary to understand that EMI payments are a liability which legally has to be fulfilled. On the other hand, SIP is voluntary. It can be stopped midway by providing a duly-signed written request to the respective fund house. Also, there is no penalty or charge of any kind for stopping a SIP.
Myth 6 - Debt funds are also affected by equity market movement
Fact - Debt funds and equity funds are two different categories of mutual funds and have no bearing whatsoever to each other concerning performance. Both the funds park money in a separate set of instruments and have a whole different portfolio as well as fund management strategy. Debt funds are a suitable option for those looking to avoid the volatility of equity markets and have a shorter time frame to achieve their financial goals.
Myth 7 - Dividend paid is a good reflection of the fund’s performance
Fact – There are many measures by which one can determine a fund’s performance, but delaying investments to see how much dividend is paid is not a good idea. Dividends are paid from the accumulated and realised profit of the fund. Under the dividend pay-out option, the profit realized is distributed among investors, whereas in the growth option, the profit gets retained as a higher NAV. A well-informed investor does not wait for declaration of dividend to purchase any mutual fund.
We hope the above-mentioned points have shed some light on how mutual fund investments function. It is essential to read up as much as possible prior to investing in mutual fund schemes. Believing in something that lacks truth can not only stop one from investing, it can also keep the individual from earning some great returns had the user been aware of the facts. Educating oneself with the right information is the best way to be prepared for investments in mutual funds.