7 Misconceptions about Mutual funds

There are many common misconceptions relating to mutual funds. These often deter many people from investing their hard-earned money. Here’s busting some of them for investors.

With the growing popularity of mutual funds as investment options, more people are including them in their investment portfolios for future wealth creation. However, there are several misconceptions regarding mutual fund investments that people often fall for. This leads them towards abandoning investment plans altogether.

Top misconceptions in this space

⮚     Wrong Fact 1- You need to shell out a large amount for investing in mutual funds- Whether you invest in banking funds like HDFC mutual funds or any other fund, you need not always shell out a huge sum for investing. You can start with Rs. 1,000 every month and gradually scale it up with increases in your income.  This means that mutual fund investments do not have entry barriers for most people. You should start gradually investing and scaling up your investments, but there is no need to risk any big sum at once.

⮚     Wrong Fact 2- All mutual funds are investments for the long haul- Mutual funds may be for long or short term durations, depending on the fund and your investment objectives. Short-term players can always go for debt mutual funds that generate better returns as compared to fixed deposits in banks. Long-term investors can take the equity route as well. You should invest as per your specific objective, risk profile, and other factors.

⮚     Wrong Fact 3- All mutual funds are eligible for tax deductions- Mutual fund investments do have some tax benefits, although this only extends to ELSS (equity linked savings schemes) under Section 80C. These investments are the only ones eligible for deductions. You should lower your mutual fund taxes with more financial planning. Consult a financial advisor in this regard.

⮚     Wrong Fact 4 - All mutual funds mean equities- Investments in mutual funds is not only about equities or stocks. They are categorized as per the predominant asset class which is being invested in. There are equity and debt mutual funds, along with other money market funds as well. The latter invest in repurchase agreements, treasury bills, and the like. Any mutual fund plan with 65% of its assets in equities is called an equity fund.

⮚     Wrong Fact 5 - A lower NAV (net asset value) of a mutual fund makes it affordable, so you can gain by buying a higher number of units- This is not something to follow blindly. The net asset value (NAV) is not always relevant, since it is not an indicator of the market price. It is the indicator of the fund’s market value (of its investments). Go for older and established mutual funds, even if the NAV is higher in comparison to a relatively new fund. This is because they have a demonstrated track record of performance.

⮚     Wrong Fact 6 - Mutual fund plans will secure the future of your kids- Remember that the future of your children will not be secured; the returns are mainly based upon the performance of these funds in the market. A fund that focuses on children will have similar risks in comparison to any regular mutual fund scheme.

⮚     Wrong Fact 7 - You should always invest in multiple mutual funds to diversify your portfolio- Mutual funds are already diversified by nature. Investing in multiple funds does not ensure automatic diversification. You should aim at truly diversifying your portfolio by investing throughout numerous asset classes or categories of mutual funds. This will spread out the risks, while diversifying your portfolio. The fund count does not matter; the types of funds are important.

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