Being popular comes with its own set of disadvantages. While celebrities have to face rumours, mutual funds have to face misconceptions. 😛 So let’s get to the chase.
Below, we bust some of the myths associated with mutual funds.
1. Investing in mutual funds is the same as investing in direct equity
Investing in mutual funds is way too different from investing in direct equity. You need expertise as well as time to research when you invest in the stock market as the market movements keep changing. Whereas, if you lack the skill set to invest in the securities market you can invest in Mutual Funds. Here, the fund manager takes decisions on behalf of you and manages the fund’s portfolio.
Second benefit of investing in mutual funds is Diversification! When you invest in Mutual Funds you get exposure to many stocks under various sectors and market capitalisations whereas when you invest in direct equity you might not have the bandwidth to diversify your portfolio in such a manner. However, it is advisable to invest in approx 5 Mutual Fund Scheme - if you invest across many schemes - you may di-worse-ify your portfolio. Also, not all mutual fund schemes invest in the share market - if your risk appetite is low you can opt for debt mutual fund schemes that invest in instruments such as Treasury Bills, Commercial Papers, Certificate of Deposit, etc.
2. One needs a large amount of money to invest in mutual funds
This is the most common myth that one needs to stop worrying about. You can invest in Mutual Fund with an amount as small as INR 100 - you need not have huge savings for it. We advise you to set your SIPs today and start your investment journey as soon as possible.
3. Buying a top-rated mutual fund scheme ensures better returns.
Do you go to a mall and buy the best shoe in the store or do you buy the one that fits you perfectly? Of course the second option, right? Similarly, when you invest in Mutual Funds, you need not invest in the top-rated scheme but the one that fits your risk profile and helps you to achieve your financial goals.
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4. Mutual fund scheme with lower NAV is better
Does low NAV means that the scheme you got is cheap? Or does Higher NAV means that the scheme has reached its peak? Both the statement mentioned are wrong! NAV should not be a deciding factor when buying a Mutual Fund Scheme. A high NAV does not mean the fund is expensive nor does it mean the scheme has reached its peak. In fact, at times, a high NAV indicates the good performance of the scheme over the years. Also, if the Fund Manager feels that a particular stock has peaked, they can choose to sell it.
5. Mutual fund investment has a lock-in period
Liquidity is one of the main advantages of investing in mutual funds, which means you can buy and sell them at your convenience. The only exception is ELSS with a lock-in period of three years and closed-ended mutual funds with a lock-in period of 3-5 years. However, exit load might be applicable on premature withdrawal for some schemes based on the type and period of your investment. Even though there is no lock-in period do not withdraw your investments anytime as per your convenience - when you invest in a scheme you need to have a withdrawal plan at that stage itself and stick to it. Be disciplined while investing.
6. Buying more funds every time I save more
Do you invest in a new mutual fund when you have money? If yes, you need to stop it now. We advise you to have only 5 mutual fund schemes. Just like too many cooks spoil the broth - too many Mutual Funds will di-worse-ify your portfolio.
Conclusion:
Stop looking for the best mutual fund scheme and start investing in the one that is right for you. You can check out our article where we have shared a checklist that you need to check while you are looking to invest in a Mutual Fund.