15 Myths About Mutual Funds That Impede Your Growth Prospects

Last updated on 7 Jun, 2018 | 0 comments

myths about mutual funds

As people are becoming financially mature they are tending towards alternative investment plans different from those traditional investment schemes like bank and post office deposits, life insurance policies etc. Although a recent trend shows investors’ inclination towards the mutual fund investments, the number is quite low comparing to traditional investments. A deeper study shows people’s knowledge about mutual funds is obscured by myths that lead to such no-investment or meagre investments in mutual funds.

Myths About Mutual Funds That Needs To Be Busted

Here are some of the myths about mutual funds and their corresponding facts.

1. There are only equities and no secured funds:

This is the first myth about mutual funds we encounter almost every day. Most of the common investors have a perception that mutual funds are in no way different from equity investments.

Fact:

Unlike other investments, mutual funds have a large variety of funds catering to diversified investment demands. There are large numbers of fund types ranging from equity funds to debt funds, open-ended funds to close-ended funds etc.

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2. Low NAV is the best choice for investment:

There is a wrong perception among the layman investors that lower NAV (Net Asset Value) mutual fund gives a better deal than higher NAV mutual funds.

Fact:

A low-value stock seldom moves faster than a high-value stock, maybe because of higher liquidity of low-value stocks. But in case of mutual funds, NAV has no such significance. The appreciation in NAV measured in percentage terms and not in absolute value. So whenever you start, you have to start from zero.

Just like the domestic funds, there are international funds investing in foreign corporates. Unlike domestic funds, international funds bear two types of risks- international market exposure and constant change in currency rate. Click To Tweet

3. There is no scope for short-term gains:

This is absurd. Common investors often find themselves in a dilemma whether to invest or not as they are overwhelmed with a misconception that mutual funds are profitable only in long-term.

Fact:

The fact is if you are in a securities market, the chances of profitability become higher in the long term especially in the case of SIP. This is because, in the long run, your average cost of investment comes down in a highly volatile market. But in a lump sum mutual fund investment that will not work. If you can time well, you can earn in short term too.

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4. Highest ranked funds fetch the highest:

Small investors often hold an idea that the highest ranked funds would fetch the highest return on their investment.

Fact:

There are numbers of credit rating agencies who do a periodical assessment of the funds based on past performance. Accordingly, they award ratings to the funds based on multiple factors (other than the rate of return). So, relying on those ratings solely may give you positive returns but not the highest one.

5. All the funds have lock-in period:

A common myth that eclipses the investment activities of common investors is that they think all the mutual funds have lock-in-period, resulting to poor liquidity.

Fact:

Most of the small investors live under a wrong notion that they cannot withdraw from their mutual fund investments before a specified period. Well, there are some funds which have lock-in-periods but in most of the cases, funds are open-ended that means you can withdraw whenever you want, leaving a processing time of three to four days. In fact, there are liquid funds where you can withdraw on a real-time basis extended to 24 hours max. Before investing you need to know the details about mutual funds.

6. Best way to invest in MF through NFO

New entrants into the investment arena often think the best way to invest is through NFO (New Fund Offer) when the NAV is just the face value.

Fact:

The logic behind such an investment strategy is rubbish. During market volatilities, the NAV may even go negative on openings. In fact, some of the wealth managers suggest that instead of going for NFO, invest in existing funds as the as they have a long history and proven track record. Moreover, while investing in an NFO, an investor would not have any idea about the portfolio composition. So, the investment decision may turn out to be a blunder.

7. One needs a Demat account for investment

Another wrong perception that hampers the investment practice in mutual funds is the requirement of a Demat account.

Fact:

Many of our potential investors often step aside when they nourish an idea that a Demat account is must for investing in a mutual fund. Though a few brokerage firms extend you the support to invest via Demat account, this is not mandatory. One may easily invest in the mutual fund directly through fund houses through both online and offline mode.

8. You need to time the market

Individual investors often muddle the equity stock investment with mutual fund investment and apply the same practices on both the cases.

Fact:

I won’t outright reject the technique of timing the market while investing in mutual funds, but they are lesser fragile in comparison to the direct stock investment. In a lump sum investment, market timing may have some effect but the SIP mode neutralises such market timing effect. The same principle is also applicable for Equity SIP.

9. A scheme with highest NAV has reached its peak-no scope for growth

When a mutual fund’s NAV reaches its peak, some of the potential investors prefer to skip that fund citing some silly arguments like the fund has met its saturation, so it leaves limited scope for growth.

Fact:

Well, such an investment ignorance may badly hamper your prospects. In the case of a stock, when the market value becomes bigger, there may have some issues with liquidity but not with growth prospects. While in a mutual fund, such a factor won’t hamper its growth potentiality. So, you should not bother about high NAV funds at all.

As the name suggests 'Monthly Income Plan (MIP)' do not offer monthly income. They are debt oriented hybrid mutual funds investing 70-80 percent in debt instrument and the balance in the equity instrument. Click To Tweet

10. Buy it, forget it

After buying a mutual fund most of the small investors, don’t even bother to monitor its performance as they have planned it for long-term purpose.

Fact:

This is the biggest mistake a common investor does. Remember, mutual funds, unlike fixed deposits, have no fixed rate of return. So, they need to be monitored at regular interval and an analysis should be done comparing the goal and the performance of the fund. If required necessary corrective steps to be taken in this regard.

11. You have to invest big funds

A lot of people still hold such a Jurassic concept to turn them away from investing in mutual funds.

Fact:

With the introduction of SIP, the minimum investment threshold amount has been dropped drastically that even a person from lower income group may invest. It offers you such a flexibility that you may invest small amounts in mutual funds on a daily, weekly, monthly or quarterly mode. This is one of the coolest reasons to invest in mutual funds than in the stock market.

12. SIPs are better than lump sum investments

A group of people holds such a perception even without any logic.

Fact:

Well, such a perception may not hold good every time. Both SIPs and lump sum investments have their own merits and demerits, it would not be easy to deduce which one is better. It’s your goals of investment as well as your investment timings that may bring the difference in return.

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13. You cannot withdraw in part

Many people thought you cannot withdraw from mutual funds in part, thus raising a question on its liquidity.

Fact:

The fact is mutual fund is the most flexible and liquid asset that you can withdraw whenever and whatever you want. You have to choose the number of units or the amount you want to redeem that’s it.

14. Only individuals can invest

Many people believe a mutual fund investment can be done only in the name of a human being.

Fact:

This is utterly wrong. Anybody can be an investor of mutual funds. Be it a human being or an artificial person like companies, organisation etc. all are eligible to invest in mutual funds.

15. I need a broker to invest.

Often people find it cumbersome to invest in mutual funds searching for brokers or agents of the said fund house.

Fact:

Well, if you are holding such an issue, you are certainly not updated. The fact is you shouldn’t wait for and can invest whenever you want directly into the fund via online and offline mode. The best thing is you won’t have to bear the brokerages on your investment. In turn, that is your gain over brokerage.

Conclusion:

Mutual fund investment is the most efficient way to appreciate your wealth. Although it bears a significant amount of market risks, it fares well if tamed in a systematic way. Studying of the myths and the corresponding facts about the mutual funds would certainly sharpen your knowledge for a accelerated growth. Happy investing.