10 Mutual funds myths busted

  • Admin
  • Sunday | 26th March, 2017

Any investment requires careful assessment and proper planning. Mutual fund investment is no different. So to benefit from your investments, you need to clear half-baked truth offered from various sources and get your facts straightened out.

Here are a few misconceptions and facts about mutual funds to help you get a clearer picture.

Myth #1: Mutual funds need large investment

Buster #1: Truth is, you can get started with very low amount in mutual funds. Sometimes with as low as INR 1,000, Based on the mutual fund you invest in,

Myth# 2: All mutual funds are long-term investments

Buster #2: Mutual funds can be short term or long term investment based on the underlying assets the mutual funds invest in. Short term investors (less than 5 years) can choose debt mutual funds which is better than bank FDs for the short term. For long term investments, equity mutual funds are the most suitable options.

Myth #3: All mutual funds qualify for tax deduction

Buster #3: Mutual funds investments do provide tax savings benefits, but only the Equity Linked Savings Scheme (ELSS) is eligible for tax deduction under Section 80C of Income Tax Act. The dividends and long term capital gains from these investments are tax free.

Myth # 4: Mutual funds = equities

Buster #4: Investing in mutual funds is not only about investing in stocks or the equity market. Mutual funds are typically classified based on the underlying asset classes they invest in, equity mutual funds (investment mostly in equities), debt mutual funds (investment in mostly debt or fixed income) and money market funds (investment in instruments such as treasury bills and repurchase agreements).

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Myth #5: A mutual fund with a lower net asset value (NAV) is cheaper, so you can profit from buying more units

Buster #5: NAV of a fund is irrelevant, because it represents the market value of the fund’s investments and not the market price.

Myth # 6: Mutual fund schemes designed for children will secure your child’s future

Buster#6: Like any other fund scheme, returns are based on market performance. A children focussed fund would carry more or less the same risk as a normal mutual fund. There is no scheme that can guarantee returns and schemes for children are no different. With the understanding that “investing is a long term venture”, analyse performance, risk and returns of any fund you invest in.

Myth #7: One needs to invest in several mutual funds for proper diversification

Buster#7: Mutual funds, by nature offers diversification. Holding a large number of funds does not necessarily offer you better diversification.

Myth #8: MFs are riskier compared to stocks

Buster #8: In mutual funds, fund managers invest your money into a basket of stocks after proper research guided by the fund’s investment objective. To that extent, your risk is diversified. Mutual funds have teams of fund managers and researchers who are constantly analyzing and watching the market and managing their portfolio. So they are likely to make more informed decisions than an individual with little time or experience.

Myth #9: Buying a top-rated MF scheme ensures better returns.

Buster #9: Mutual fund ratings are dynamic and based on performance of the fund over time. So, a fund that is rated highly today, may not necessarily maintain its rating a year later. While a highly rated fund is a good first step to short list a scheme to invest in, it does not guarantee better returns eternally. Investments in mutual funds need to be tracked with respect to its benchmark to evaluate its performance to stay invested or exit.

Myth #10: Mutual funds have a lock-in period

Buster #10: This is a half truth. Except for tax-saving funds (ELSS) and closed-ended funds, most mutual funds have no lock-in periods. You can redeem them easily when you need to, subject to exit load, where applicable.  Once you get the facts right, investing in mutual funds will be a simple process.


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