Myths & Facts about Mutual Funds

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Myths & Facts about Mutual Funds

Myth : Mutual Funds are for experts

Fact : In fact, Mutual funds are meant for of common investors who may lack the knowledge or skill set to invest in securities market. Mutual Funds are professionally managed by expert Fund Managers after extensive market research for the benefit of investors. A mutual fund is an inexpensive way for investors to get a full-time professional fund manager to manage their money.

Myth : Mutual Fund investments are only for the long term

Fact : Mutual funds can be for the short term or for longer term based on one’s investment horizon and objective.

There are different types of mutual fund schemes – which invest in different types of securities – in equity as well as debt securities that are suitable for different investor needs.

In fact, there are various short-term schemes where you can invest for a few days to a few weeks to a few years e.g., Liquid Funds are low duration funds, with portfolio maturity of less than 91 days, while Ultra short-Term Bond Funds are low duration funds, with portfolio maturity of less than a year. There are Short-Term Bond Funds which are medium duration funds where the underlying portfolio maturity ranges from one year – three years. Then, there are Long-Term Income Funds which are medium to long duration funds with portfolio maturity between 3 and 10 years.

While Equity Schemes are most suitable for a longer term, debt mutual funds are suitable for investors with short term (less than 5 years) investment horizon.

Myth : Investing in mutual funds is the same as investing in stock market / Mutual Fund is an equity product

Fact : Mutual Funds invest in stock market (i.e., equities), bond market (corporate bonds as well as govt. bonds) and Money Market instruments such as Treasury Bills, Commercial Papers, Certificate of Deposit, Collateral Borrowing & Lending Obligation (CBLO) etc. Many of these instruments are not available to retail investors due to large ticket size of minimum order quantity (such as G-Secs) and hence, retail investors could participate in such investments through mutual fund schemes

Myth : Mutual Fund scheme with a NAV is rs.10 per Unit better than Mutual Fund scheme whose NAV is rs.25 per unit (Or a mutual fund scheme with lower NAV is better Or Investing in NFOs are preferable than investing in existing schemes).

Fact :This is a common misconception. A mutual fund's NAV represents the market value of all its underlying investments. NAV of a fund is irrelevant, because it represents the market value of the fund’s investments and not the market price. Any capital appreciation will depend on the price movement of its underlying securities. Let us understand this through an illustration.

Suppose, you invest rs.10,000 each in scheme A whose NAV is rs.20 and scheme B (whose NAV is say, rs.100. You will be allotted 500 units of scheme A and 100 units of scheme B. Assuming that both schemes have invested their entire corpus in exactly same stocks and in the same proportions, if the underlying stocks collectively appreciate by 10%, the NAV of the two schemes should also rise by 10%, to rs.22 and rs.110, respectively. Thus, in both the scenarios, the value of your investment increases to rs. 11,000.

Thus, the current NAV of a fund does not have any impact on the returns.

Myth :One needs a large amount of money to invest in Mutual Funds

Fact : Absolutely incorrect. One could start investing mutual funds with just rs.5000 for a lump-sum / one-time investment with no upper limit and rs.1000 towards subsequent / additional subscription in most of the mutual fund schemes. And for Equity linked Savings Schemes (ELSS), the minimum amount is as low as rs. 500. In fact, one could invest via Systematic Investment Plan ( SIP) with as little as rs.500 per month for as long as one wishes to.

Myth : One needs to have a Demat account to invest in Mutual Funds

Fact : Holding mutual fund Units in Demat mode is absolutely optional, except in respect of Exchange Traded Funds. For all other schemes, including the close-ended listed schemes like Fixed Maturity Plans (FMPs), it is entirely upto the investor whether to hold the units in a Demat mode or in conventional physical accountant statement mode.

Myth : A Scheme with a higher NAV has reached its peak !

Fact : This is a very common misconception because of the general association of Mutual Funds with shares. One needs to keep in mind that the NAV of a scheme is nothing but a reflection of the market value of the underlying shares held by the fund on any day. Mutual Funds invest in shares, which may be bought or sold whenever deemed appropriate by the Fund Manager depending on the scheme’s investment strategy (Buy-Hold-Sell). If the Fund Manager feels that a particular stock has peaked, he can choose to sell it.

A high NAV does not mean the fund is expensive. In fact, high NAV indicates a good performance of the scheme over the years.

Myth : Buying a top-rated mutual fund scheme ensures better returns.

Fact : Mutual fund ratings are dynamic and based on performance of the scheme over time – which in itself is subject to market fluctuations. So, a Mutual fund scheme that may be on top of the rating chart currently, may not necessarily maintain the same rating month after month or at a later date . However, a top rated fund is a good first step to short list a scheme to invest in (although past performance does not necessarily guarantee better returns in future). Investment in a mutual fund scheme needs to be tracked with respect to the scheme’s benchmark to evaluate its performance periodically to decide whether to stay invested or to exit.

Source of knowledge center: AMFI