Here are a few myths that equity investors usually tend to believe in and end up investing at wrong places or incurring losses on their investment.
Mutual funds are subject to market risk
The warning is clearly been given to make the investors aware that the investments made by mutual funds cannot be guaranteed and the funds do not promise returns to the investors. However, it is important to understand that this risk depends on a lot in which scheme is one investing in and for what duration. The risk can be reduced by choosing the right plan and scheme for the right time duration, or investing in funds through systematic investment plan, where you contribute at regular intervals. Diversification into multiple stocks, which usually happens in mutual funds, also helps reduce the intensity of the risk as compared to direct investing.
Mutual funds are only for long-term investors
People often tend to believe that the investors who do not stay invested for a longer period of time get nothing out of their investments. Staying invested for a longer time undoubtedly increases the corpus. However, there are schemes particularly created for short-term investors as well. These schemes range from a period of one month to three months extending up to a year as well. Short-term investors, therefore, have a lot of options and can get fair returns out of their investments.
Mutual funds invest only in equities
Another reason that keeps equity investors away is that they believe mutual funds also invest only in equities. This is definitely not true as it goes against one of the basic benefits of mutual funds i.e., diversification. Mutual funds tend to diversify your funds in different avenues such as equities, debt and other avenues. There are even balanced funds that help you enjoy the benefit of both equity and debt. If you want to completely stay away from the volatility of the equity market, you can even choose to invest in an all debt fund.
You can’t go wrong with five-star rated funds
A five or four-star rating to a mutual fund doesn’t guarantee its better performance. Even though the past records have been impressive, the future results aren’t always predictable in the stock market. These ratings keep on changing and that’s what keeps the stock market so uncertain in nature. Therefore, only ratings cannot be considered as criteria for selecting a mutual fund to invest in. It has the tendency to change ratings based on its risk-adjusted performance and volatility of its returns. Both of these must be paired alongside to get an idea about a fund’s prospects.
Mutual funds are safer than stocks
People often have a misconception that direct stocks are riskier than mutual funds. The difference between the two is just that the mutual funds reduce the risk of investment in a stock and diversify it to more stocks. These funds are handled by professional managers which make it less prone to risk than stocks. The investor must, therefore, not be of the view that an equity mutual fund is a safer option over stocks. Both of them hold equal risk, especially when the market is in a bearish phase. However, mutual funds unlike direct stocks, undoubtedly offer more exposure and let you hold multiple stocks, giving you an advantage of holding some part of your investment as cash.
Believing in myths will not just stop you from investing but also lead to loss of some great returns that you could have earned had you known the facts. But it’s not too late too. The points mentioned above are just some examples of the various myths surrounding the stock market and mutual funds. Educate yourself with the right information so that you are better prepared to invest in mutual funds.