Top 7 myths around mutual fund investing debunked
In today’s complex financial markets, Mutual funds remain one of the most trusted investment options for those looking to create wealth. However, like any area of investment, mutual funds have their share of misunderstandings or myths among investors. These tend to build an unrealistic image of mutual funds in the eyes of investors. As more investors in India are considering mutual funds as a good investment alternative, it is important for experts to debunk some of these myths to help create a positive investment environment.
Here, we present some common myths around mutual funds that investors should not believe in and why.
Mutual fund investment requires a lot of money
The myth around the quantum of investment required in mutual funds often acts as a discouragement for new investors. Many investors believe that wealth can be only created with large sums of money. While this may be true for investment avenues like stock markets, it is not applicable to mutual funds.
Fact – To invest in a Mutual Fund, one can make use of the Systematic Investment Plan (SIP) option and begin investing with a small value of Rs. 100 in many funds. As they gain experience in mutual fund investing, investors can increase the amount as per their capability and financial goals.
Let’s take an example to better understand the investment amount required in mutual funds. For a mutual fund that has historical annualised returns of 12%, investing a small sum of Rs. 2,000 per month may fetch Rs. 20 lakhs over a period of 20 years. SIP is also beneficial in building a practice of regular and disciplined savings. ELSS, on the other hand, locks an investor’s funds for 3 years which can allow the money to grow without being influenced by the ups and downs of the market. (Investors must carefully evaluate mutual fund options before making an investment since historical returns may not always mean positive future returns).
Mutual fund investments are totally risk-free
A common message that can be seen and heard in most mutual fund advertisements is that these are subject to market risks. Similar to stocks, mutual funds that primarily invest in equities are also exposed to the effects of market crashes and may see a dip in the net asset value (or NAV). Even if a mutual fund invests in government bonds that are considered safe, there is always some amount of risk. A significant change in interest rates can affect fund returns in this case.
The golden rule for every mutual fund investor to note is higher the expected returns, the higher will be the risk. Attached to the myth of ‘no risk’ is the myth that mutual funds can provide guaranteed returns because these are actively managed by fund managers. This is far from the truth.
Investors must consider the fund manager’s experience before deciding on their investment. The fund should also be sufficiently diversified with a good track record of returns. Investors who fall for mutual funds that promise high returns within a short time period may invite additional risk to their investment portfolio.
Only market experts must invest in mutual funds
While investing in mutual funds, knowledge can act as an added advantage. However, having limited or no knowledge cannot hinder the process of investment. Mutual Funds can in fact be used as a gateway to create wealth and achieve financial goals by new investors. This is because the investments are handled by experienced and professional fund managers who are associated with the mutual fund. For investors who want to learn about mutual fund investing, they can always make use of investment advisors who can help make the right investment decisions and choose the right mutual fund.
Mutual funds mainly invest in equities
Another common myth among new investors of mutual funds is that they focus only on the equity market and therefore provide higher returns compared to other financial instruments. However, mutual funds come in different varieties and invest in different instruments including equity, debt, real estate, government bonds, etc.
Depending on the category of MF, the risk and returns could vary. Funds that are purely focused on equity generally have high risk and returns. Debt funds, on the other hand, have relatively lower risk and lesser returns. There are also balanced funds that are a mix of equity and debt. These may offer higher returns for a time horizon of three to five-years.
Historical returns guarantee future performance
This is a myth since a fund’s past performance is not necessarily a guarantee of positive returns in the future. A mutual fund may underperform, even if it has had a streak of high returns in the past. To estimate a fund’s performance, one must go through details such as past returns, time horizon, investment categories, market conditions throughout the returns generated, etc. Instead of purely relying on mutual fund ratings, it is important for investors to dig up some of these details before making an investment decision.
Mutual funds are ideal for long term investment horizon
Investors can consider mutual fund investment from both long-term and short-term perspectives, depending on individual financial goals. Some of the variants can also be used for the short and medium-term. Mutual funds invest in debt, equity, and some also have hybrid models which include both forms of investment. These come with different maturity periods. So, investors with short, medium, and long-term goals can choose funds that suit their requirements and risk appetite.
Demat account is a must for mutual fund investment
Except for ETF investment, one does not need to have a Demat account for mutual fund investment. Mutual fund units can be held in a Demat account or online with the AMC. There are also mutual fund investment apps like Finity, which help investors to directly invest in mutual funds by first selecting a fund and providing basic personal / bank details on the app.
Mutual fund myths can act as blockages for investors who are looking to diversify their investment portfolios. It is important to clear these myths and proceed on the path of mutual fund investments since these can be beneficial in more ways than one.