7 Myths & Facts About Mutual Funds You Must Know

At what age did you realize mutual funds can grow your wealth over the years? And if you haven’t realized it yet, the reason could be the lack of information.  Despite diverse options and ease of investment, mutual funds are surrounded by many misconceptions. Investors are still confused and, hence, are missing out on opportunities. In this blog, we will shed light on the facts about mutual funds to debunk the myths. 

Mutual Fund Myths Busted

Myth #1: You Need a Demat Account to Invest in Mutual Funds

Fact: A demat account is not required to invest in mutual funds.  All you need is a bank account, PAN card, and KYC details. The online interface that you use to invest in mutual funds is not a demat account. Unlike stocks, mutual funds do not have a dematerialized form.  Your existing bank application also has a mutual fund section. You can invest in a mutual fund of your choice without any hassle. It’s an easy way to automate the investments from your savings account to the mutual funds. You will only need a Demat account if you plan to invest in direct stocks. 

Myth #2: You Need Financial Expertise to Invest in Mutual Funds

Fact: Investors do not have to be financial experts to invest in mutual funds.  Mutual funds are designed to make investments easy for anyone. Choosing direct stocks requires knowledge, constant awareness, and time to monitor the investments. Mutual funds, on the other hand, offer instant diversification. Each fund distributes your money in various asset classes such as stocks and bonds as per the category of the fund.  Mutual funds are already managed by an expert, so investors don’t have to. However, it’s always better to be informed about mutual fund categories and scheme objectives which can be found on a fund factsheet. You can consider taking inputs from your wealth planner/relationship manager. They can guide you with the suitable asset allocation.

Myth #3 You Need a Large Sum to Invest In Mutual Funds

Fact: Again, incorrect. A large sum is not required to invest in mutual funds.  You can start an SIP of as little as Rs. 100 per month and gradually increase the amount. A lump sum investment can also be made with a minimum of Rs. 5000. 

Myth #4 You Can Invest in Mutual Funds Only For a Long Term

Fact: Mutual funds are available for short, medium, and long-term tenure.  The investment horizon depends upon your financial goals and risk appetite. There are various categories of equity mutual funds, debt mutual funds, and hybrid funds. Based on your investment horizon, you can choose the category of mutual fund you want to invest in. The longer your time horizon, the more you can invest in equity or equity-related instruments (if your risk appetite allows). For a shorter horizon, you can choose from debt funds. Debt funds have 15 different categories with variable investment horizons. Liquid funds (7 days), Ultra-short duration funds (up to 3 months), and low duration funds(3-6 months) can help you achieve short-term goals. Medium and long-duration debt funds are suitable to achieve long-term goals. 

Myth #5: A Mutual Fund with a Lower Unit Price (NAV) is Better Than One with a Higher Unit Price

Fact: The unit price (NAV) is not relevant to compare two mutual funds. Two mutual funds with identical portfolios will deliver similar returns irrespective of the NAV. The unit price is nothing but the value of all the underlying assets in a fund. These assets include stocks, bonds, and money market securities.  Let’s take an example: You have 5000 to invest in a mutual fund. The NAV of a fund ABC is Rs. 50 and of a fund XYZ is Rs. 100. Both schemes have similar composition.  If you invest in ABC, 100 units will be allotted to you. Whereas, if you invest in XYZ, you’ll get 50 units. Now, let’s assume the underlying assets of both funds appreciated by 12%. Since both funds hold the exact same stocks and bonds, both funds will deliver 12% returns. Fund ABC’s NAV will become 56 and fund XYZ’s NAV will become 112. In both cases, your 5000 will increase to 5600 irrespective of the NAV. 
Fund Name Unit Price Investment Amount Units Allotted Return Rate p.a Total Value of Investment
ABC 50 5000 100 12% 5600
XYZ 100 5000 50 12% 5600
Therefore, while comparing two mutual funds, check the key ratios instead of NAV. 

Myth #6: Mutual Fund’s Past Performance Guarantees Future Returns

Fact: The past performance of a fund is just a way to evaluate the fund’s consistency over the years. It does not guarantee anything for the future.  A fund that performed well in the past may not perform the same in the future. Similarly, a poorly performing fund may show promising outcomes in the future. There are various other factors apart from past performance that can offer better insights about a fund. For example, the underlying assets, the fund manager’s strategy, economic changes, etc. If you still want to check the past performance, analyze the rolling returns of a fund. Rolling returns suggest how the fund has performed in changing economic cycles.   

Myth #7 Equity Funds are Riskier than Other Funds

Fact: Every investment instrument has a risk associated with it. The decision to invest depends upon the time horizon, investor’s risk appetite and financial objectives. Would you buy a house and sell it within 6 months or a year? No! Real estate investment is meant for a longer horizon.  Similarly, equity investments also deliver risk-adjusted superior returns over 5 or more years. For a short horizon, equity investments are not ideal. Instead, you can invest in debt funds with a suitable tenure. Additionally, you must choose investment options based on your risk appetite. That way, you can choose different asset classes to diversify your portfolio and balance the risk. 

Final Verdict

Mutual funds have become a popular investment avenue for many investors. Not only does it offer hassle-free diversification but also significant wealth growth. A Systematic Investment Plan is a consistent way of investing in mutual funds. That way, you can achieve your financial goals in a given timeframe.  Don’t let any misconceptions stop you from becoming financially independent. Craft your investment portfolio and enjoy the benefit of compounding. If you are based in Pune and are looking for a financial advisor in Pune, experts at VNN Wealth can meet you in person to discuss your portfolio. If you're not based in Pune, you needn't worry as you can schedule a virtual meeting at your convenience. For more information, follow @vnnwealth and explore investment insights here.