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.
misconceptions in this space
Fact 1- You need to shell out a large amount for investing in
mutual funds- Whether you invest in banking funds
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
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.
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.
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.
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.
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
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.
These are seven
misconceptions pertaining to mutual funds that should be busted at the outset.
Do your homework, take financial advice if needed, and invest in mutual funds
after assessing your own risk appetite and financial position.