Mutual fund investment is known to provide good returns if invested properly. But the scenario becomes daunting with mention of mutual funds as they are considered very risky and have so many misconceptions associated with it.
It is necessary to understand that mutual funds are just like any other funds with a risk factor which regulates the rate of returns. These mutual funds are associated with market movement making them risky. Investment in mutual funds is made by considering various factors associated with it. Without having a clear view about mutual funds, one cannot completely trust upon good returns provided by mutual funds.
In order to gain more interest in mutual funds, you should be clear about misconceptions that are associated with it. The sooner you learn about myths of mutual funds, the better it is for investors.
Some of major mutual fund myths are discussed here –
- Myth – “In order to invest into the mutual funds, I would require large sum of money”
Fact – “One can invest into the mutual funds with a minimum amount of Rs. 500 per month”
It is a very common misconception amongst people that in order to invest into mutual funds and to earn maximum returns, large sum of money is required. But that is not true. The fact is that a person can invest minimum amount of Rs. 500 per month in mutual funds through Systematic Investment Planning (SIPs). Investment into mutual funds can be increased gradually with rise in income in later years but invested capital would still provide good returns every year. For example, a person invests in mutual funds giving average returns of 12% annually and an investment of Rs. 2000 per month is made into it. After 20 years, the person would receive 20 Lakh rupees. In addition to it, if investment was increased by 10% every year then the person would be gaining 39.5 Lakh rupees after 20 years.
Many drops fill the ocean. Similarly, systematic and small investment can lead to large corpus after a particular time period.
- Myth – “Only an expert can invest into the mutual funds”
Fact – “The investment in mutual funds is researched and regulated by an expert fund manager”
Mutual funds are surrounded by misconceptions which influence the investors to avoid them mostly. It is because most of the people don’t know about them. But truth is that mutual funds are actually an excellent option for those who know less about making investments. The investment research and analysis is done by mutual fund experts. The mutual fund manager is responsible to choose stocks for you and decide when to trade them.
- Myth – “Mutual funds only invest into the equities”
Fact – “The array of investment of mutual funds are diverse”
This misconception needs to be broken that the mutual funds only invest into pure equities. The fund manager splits invested capital and invests them partially to debt funds and partially to equities. As of 30th September 2016, 66% of the assets that are under management are invested in debt funds and investment into equities is limited up to 32%. So, mutual funds investments not just provide you good returns but they are also beneficial in tax treatments. They are much better than fixed deposits. Mutual funds also deal in investing the assets under management into balanced funds which is a hybrid of equity and debt funds. Gold investment is also a part of the mutual fund investments. This diversification clearly indicated that mutual funds are associated with a wide range of investment plans.
- Myth – “A five star rated fund would always be the best”
Fact – “Ratings are based upon past performance which is not sole deciding factor in selecting the best mutual fund”
The ratings to mutual funds are provided by investment experts. It is generally based upon the performance of mutual funds in past few financial years depending upon its risk factor. But these rating would provide a vague idea to the investors and not a complete scenario. A five star rated mutual fund can become three or two stars in the next financial year. Mutual funds are dependable on various factors which can shift the graph of that particular fund. Ratings needs to be paired with various other factors like risk, past performance, average rate of returns, and so on to achieve a fair idea.
- Myth – “Investment into the SIPs would prevent loss of money”
Fact – “Investment into market equities, whether lump sum or through SIPs are prone to loss”
SIPs are just to reduce the average investment of investors and to minimize its risk factor. Without proper investigation and analysis of the equities, investors should not put their money into mutual funds. Cost averaging plays a major role in investment through SIPs. Though, SIPs give lesser returns than bulk investment in market, but both the cases are prone to loss.