What Are The Common Mutual Fund Myths

August 14^th 2018

Out of all the investment options available in the market, investors tend to choose the ones that are less risky and offer high returns. The interest rate on fixed deposits and savings account are declining, which has led investors to look for alternative options to park their money.
With long-term financial goals and a corpus in hand, every investor looks for options that will help them maximize their wealth. Mutual funds are considered as an ideal investment option due to the benefit of compounding interest, ease of investment, and low risk. The fund managers handle the investment and ensure that the same is invested into debt and equity securities that help diversify the portfolio.
However, not many investors are aware of the features of mutual fund investment and do not have a clear idea about the same. It is important to gain a thorough knowledge of this investment avenue before making any decision.
Some of the most common mutual fund myths that investors believe in include the following:

Balanced funds carry low risk

Many fund managers advise investors to invest into balanced funds since they have a low risk. But this is not true and is an investment myth. Balanced funds also invest in equity, which means they will be affected by the ups and downs of the market. Even the top-performing funds have an impact on their Net Asset Value (NAV), caused by market movements.

Lower the NAV, cheaper the fund

Investors are often under the assumption that the NAV of the fund is the value of the fund. This is not the case. The NAV is the current market value of the fund. If you are investing in a fund today, you will have to purchase the units at the current NAV. However, a lower NAV does not mean that the fund is cheap. The older a fund, higher is its NAV.

You require a huge sum for investment

Another investment myth is that Investors have a perception that they need a huge sum for mutual fund investment. This is absolutely wrong. You may invest an amount as low as INR 500 in a fund to begin with.

There is no tax on mutual funds

The general opinion of investors is that there is no tax implication on mutual funds, which is also the easiest way to sell the fund. This is a mutual fund myth, it is important to note that no fund is tax-free. Capital gains tax is applicable on the earnings made from the investment, depending on whether the fund qualifies as an equity instrument or a debt instrument. ELSS funds do allow you to get tax deductions on your salary up to ₹1.5 lakh per assessment year.

Mutual funds only invest in stock market

It is a mutual fund myth, but people are often under the impression that mutual funds only invest in shares and are suitable for aggressive investors. On the contrary, there are a variety of funds available suitable for every type of investor as the fund houses invest in a variety of instruments. The investors may make their choice based on their risk appetite and tenure.

Mutual funds are only for long-term

It is true that better returns may be expected from long-term mutual fund investment. However, you may invest in funds for a shorter period as well. Several funds such as liquid funds, dynamic bond funds, and ultra-short-term funds are available for a shorter period.

Do not invest when the market is high

This is an investment myth. The market will constantly have its highs and lows. This should not influence your investment decisions. With a long-term investment, the impact of the market movement will be smoothened out. So even if you are entering the market when it’s bullish, it is recommended that you go for a systematic investment plan (SIP) in order to ensure regular investment and reduce the impact of market volatility.

Debt funds are like bank fixed deposits (FDs)

It is wrong to compare debt funds to bank FDs. There are many differences between debt funds and savings accounts. Debt funds carry risk and an incremental rate of return. They are less risky than equity funds and the return is in the form of interest accrued on investment. On the other hand, FDs have a fixed return and do not have any market risks associated to them.

Invest in top-performing funds only

There is no sure shot formula that will ensure that a five-star fund will perform better in the future. Various financial institutions have a rating on the mutual fund schemes, which is based on the past performance. But remember, a top-performing fund today may underperform tomorrow.
Mutual fund myths tend to overpower the decision-making ability of the investor, which in turn leads to irrational decisions. Understanding of an investment option is as important as investing into the same. Consider the current financial position and only invest if the investment meets your requirements.
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