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5 common misconceptions people have in their mind regarding mutual funds 

In the recent years, Mutual Funds have become one of the more widely used and trusted instruments for wealth creation. The recent Mutual Funds Sahi Hai campaign has not only enhanced the industry’s visibility but in turn, led to mass adoption as seen by the record inflows in the past year or so. Early technology adopters- young students and professionals have identified the ease of registration, transaction, and tracking and joined the bandwagon. However, there is plenty of confusion regarding this instrument, its processes, returns and so on.

Here are 5 of the common misconceptions that most people have in their mind regarding mutual funds.

  1. The investment requires a lot of money

Many investors believe that you require a large sum of money to invest in mutual funds to garner substantial returns. This myth has been busted often in these last few months. You can invest an amount as low as Rs. 500 through Systematic Investment Plans (SIPs) every month. This investment amount can proportionally increase according to the increase in your income. Let’s say you invest an amount of Rs. 2000 every month for 20 years. Let us also assume the annualized rate of return is 12% and it is adjusted for inflation. The SIP can fetch up to Rs. 9,00,000 respectively.

Use this SIP Calculator to project your possible returns – https://sipcalculator.in/

Pro Tip: There is no sure shot method of predicting when the market is going to be at its peak and when it would change for the worse. Hence, invest when you have money, even if it’s a small amount. The earlier you start, the bigger the corpus you can build.

  1. You need to be a long-term investor

People tend to believe that Mutual Funds is a safe bet for only those who wish to stay invested for a long period of time. Though long-term investment horizons will increase the corpus, short-term profits are possible. There are many schemes which have been specifically designed to generate short-term profits. These range from 1 month to 3 months, or even extending up to a 1 year. Smart investors who have analyzed and timed the market perfectly can also make short-term profits.

Pro Tip: For a short-term investment you may set a goal which is not in line with your usual risk appetite. For example, if your financial goal is to build a retirement corpus, it is advised to invest in funds that have an exposure to equity that generates inflation-beating returns.

  1. The higher the rating, the higher the returns

Though ratings can be accredited by any credit agency, it is not always the most relevant tool to assess the performance of any fund. The ratings change according to the performance of the fund. A highly-rated fund today can also underperform in the future. There is no guarantee. Hence, investors would be advised to not treat ratings as the only factor to choose to invest in a fund. It would be beneficial to use it as one of the many tools used to analyze any mutual fund’s expected performance.

  1. Low NAV funds fetch better returns

NAV stands for Net Asset Value which is the sum total of the market value of all the shares held in the portfolio including cash, less the liabilities, divided by the total number of units outstanding. It represents the market value and not the market price.

For example, if you have two choices,

  1. Fund A : 1000 units with a NAV of Rs. 10
  2. Fund B : 100 units with a NAV of Rs. 100

After a year, keeping all other factors constant, both funds grow at 20%. This would result in a return of Rs.12,000 for both funds respectively. Hence, the NAV of a fund does not affect the return.

A mutual fund should not be avoided because of its high NAV value as the size of the NAV has no bearing on a fund’s return-generating capacity. Other factors such as past performance, future progress, quality of fund-management etc. should be looked into.

  1. All Mutual Funds provide tax saving benefits

Contrary to popular belief, all mutual funds do not provide tax saving benefits. Only Equity Linked Saving Scheme (ELSS) based funds are eligible for tax deduction. These tax saving mutual funds are tax deductible for up to a maximum amount of Rs.1,50,000 under Section 80C of the Income Tax Act.

Pro Tip: You can actually reduce the tax paid on your total mutual fund returns with careful planning, analysis and constant regulation.

Another important misconception among investors is that you require a DEMAT account to invest in Mutual Funds. This is not the case. One can directly purchase the fund through distributors or from the respective fund houses. Most of these funds are online and can be bought as well as sold on these platforms.

Before investing in any fund, it is important to sort the half-baked truths from unreliable sources and get the facts.

 As is in life as it is in investment,

“Half knowledge is worse than ignorance.”

Thomas B Macaulay

 

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