5 Common myths about mutual funds that you should steer clear of!

Let us discuss the top 5 myths about Mutual funds, so that you are better informed before making any investment.

Sep 09, 2020 09:09 IST India Infoline News Service

So let’s get to the chase.

You are planning to finally make regular investments in the mutual fund market. That is a sound idea! Since June 2015, the value of managed assets in India’s mutual fund industry has grown from Rs. 11.73 trillion to Rs. 25.49 trillion – that is more than double the investment in just five years.

This means that more Indian investors are now realizing the value of mutual funds – and how they work. However, the mutual fund industry is still dogged by some common investment-related myths – that you should beware of.

Let us discuss the top 5 myths about Mutual funds, so that you are better informed before making any investment.

Myth 1 – You need to invest a high amount into mutual funds

The first common myth that most potential investors hear about mutual funds is that they need to have a healthy bank balance – containing five-figure amounts or even lakhs – to invest in this instrument.

This is no longer the truth – in fact, you do not even need to make a one-time investment.

Most mutual fund (MF) companies offer an easy-to-pay Systematic Investment Plan (SIP) where you can invest amounts – as low as 500/- - every month. By regularly investing in SIPs each month, you can utilize the power of compounding and market returns to build a healthy fund.

Image source: Economic Times

Myth 2 – There is no risk involved in mutual funds

“Mutual funds are subject to market risks” – that is a common message customers hear after a mutual fund advertisement or promotion. Just like company stocks, mutual funds that are invested in the equity market are also susceptible to crashes or a fall in its net asset value (or NAV).

Even when you are investing in government bond-based fund that is considered relatively safe, there is an element of risk – as a major change in interest rate down the line can impact your fund returns.

Higher the expected returns, higher is the risk.

Image source: Geojit Financial Services

Among a common myth, most investors believe that all mutual funds are well-managed by all fund managers and provide guaranteed returns. This is not the truth. Before investing, make sure that your fund is amply diversified and has a good previous track record. Mutual funds that promise great returns in a short time can also prove to be risky.

Myth 3 – You need to be a Mutual Fund expert to make money

This third myth is only partially true. Since 2013, some mutual fund schemes can be purchased through direct plans by investors – where they can use their own knowledge without going through any intermediary company or agent and thus, saving on commission charges.

Image source: Business Today

However, most MF schemes are regular plans where you do not need to be an expert before investing. MF companies use their own expertise and the market experience of their fund managers to allocate your money wisely and ensure good returns.

Myth 4 – Mutual fund companies only invest in the equity market

Another common myth among investors is that MFs only operate in the equity or equity-related securities market – hence, they are able to provide higher returns as compared to other financial instruments. The fact is there are different types of mutual funds that invest your capital into different instruments including equity, debt, government bonds, and even real estate trusts.

Image source: Principal Mutual Fund

Depending on the MF category, the risk and returns from the fund can also vary. While “pure” equity funds are high on risk and returns, debt funds are relatively safer – but offer lesser returns. On the other hand, balanced funds are a mix of both equity and debt – and can offer you excellent returns for a three- to five-year investment term.

That brings us to our final myth – do you need to invest in MFs for a long period to earn handsome returns? Keep reading.

Myth 5 – Mutual funds require long-term investments.

The first impression that most investors have about MFs is that they are long-term investments. While long-term investing (such as 5 years) does work for good returns, there are MF categories like short-term debt or liquid funds - that can also provide better returns than other instruments like fixed or recurring deposits.

Image source: Economic Times

So, the next time you want to save money for a family vacation, do evaluate some of the best short-term debt or income funds that can help you earn a lump sum amount.

Conclusion

The more you steer of these five common myths, the better informed you are when starting your own mutual fund investments. With facilities like SIPs and balanced funds, you can build a healthy MF portfolio by evaluating and investing in the best MFs operating in the financial market.

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