Investors are often apprehensive about choosing mutual funds as their investment option because of the myths attached to it. This article aims to break down misconceptions about investing in mutual funds, so that investors can channelize their money in the right investment to enjoy full benefits of this investment vehicle.
1. Investing in Mutual Funds has same risk as buying equity
Many people falsely believe that investing in mutual funds are all about the stock market as most of the commercials about mutual funds refers to investment in the form of equity. Whereas, the fact that mutual funds invest in different instruments like bonds, money market instruments like T-Bills, Certificates of Deposit (CDs), Commercial Papers (CPs), etc as well. Most of these instruments are not available for retail investors due to their large tick size and minimum order quantity. Hence, Mutual Fund schemes facilitate such investments to retail investors at affordable investment amounts. As debt funds represents a large asset class of mutual funds which invest in different fixed income securities like bonds and debentures. It gives the investors a wide array of underlying assets to choose from according to their risk appetite. Investing directly into stock market through equity can have comparatively high risk as various individual securities will require more money to invest. Whereas, Mutual Fund reduces this risk through active diversification of the portfolio.
2. Mutual Funds are expensive
A great deal is heard about the allocation of investments and how investors need a lot of money to invest. A lot of investors think that in order to earn money, large amounts should be invested first, which often leads investors to bail out. The fact is that one can start investing through a mutual fund scheme with a one-time investment of Rs. 5000 with no upper limit and for as low as Rs. 500 with Systematic Investment Plan (SIP) with no upper limit and Rs. 1000 for other lumpsum investment schemes. With time, investors can increase their instalment amounts as per their interests. Subsequently, mutual fund schemes offer different investment strategy according to investors need as SIP has a provision of regular and disciplined investing, while Equity connected Saving Scheme (ELSS) has an investment lockdown period of minimum 3 years which helps money grow without being affected by market volatility.
3. Mutual Funds Guarantee Returns
Mutual funds have been recognized for delivering high returns to the investors which is the major reason for its recognition. However, the truth is it does not guarantee returns. Mutual funds are market-linked instruments and portfolio value may fluctuate based on market ups and downs. Listed mutual fund ratings are based on past performance of the fund over time, which does not assure same returns in the future. Investing in mutual fund scheme needs to be compared with its benchmark to evaluate its performance and decide when to stay invested or to exit. There is a scope for high returns but no guarantee.
4. High rated mutual funds offer better return
Investors often tend to invest in mutual funds according to the specified rating. Whereas, the mentioned ratings are evaluated based on the past performance of that fund and does not guarantee same returns in the future. One should always invest in mutual funds after analysing their own preferences, needs and understanding the behaviour of the market.
5. SIPs can’t be stopped once started
People sometimes confuse SIP payments with EMI payments on loans. It is mandatory to understand that EMI payments are restricted to loans and are a liability that needs to be fulfilled. Whereas, SIP is voluntary. It can be stopped upon investors written request to the fund house. Also, no duty or penalty is charged upon stopping a SIP.
6. Only experts invest in Mutual Funds
In fact, Mutual funds concentrates on retail investors who lack the know-how and skills required to wisely invest in the financial markets. Mutual funds are actively managed by professional managers after deep research into the market for investors benefit. Mutual funds are the least expensive way for investors to get their wealth managed by professionals and achieve their financial goals. It further assists you about investing according to your risk appetite and helps in decision making.
7. Mutual funds are long term investments
Mutual fund offers investment schemes spread over different time horizons according to one’s investment objective. The duration of fund depends upon the category of fund, period can range from short term to long term. It can be as short as for 91 days and can go up to several years. Mutual funds invest in various instruments- equity, debt and money market instruments that are suitable for various investor needs. In fact, mutual funds offer various schemes where you can invest from few days to few weeks to many years. Eg. Liquid Funds and Ultra short-term bond funds which are low duration bonds, with portfolios ranging from 91 days to less than one year, respectively. While the maximum returns are obtained in long-term, investing for short-term is still better than parking funds in FDs.
8. Investing in Mutual Fund is a tedious process
Investors have a misconception that investing in mutual funds is a tedious and a time-consuming process and involves opening a Demat account. Whereas, Mutual fund gives investor an option to either hold units in physical form or in Demat account. An individual can easily invest in mutual fund through online distributor, directly from the fund house or through a broker on exchange. Investor can even get recommendation on the type of scheme which suits their investment objective.