Investing in mutual funds is a great way to generate wealth. However, there are a substantial number of misconceptions revolving around mutual funds and this is why people often avoid exploring this investment option. You have probably heard quite a number of mutual fund myths. In this article we are about to bust some common mutual fund myths for the first time investors.
One needs a large sum of money to make an investment in mutual funds :
A very common misconception among the masses is that a large sum of money is needed to invest in a mutual fund. However, this is not true. You can invest a sum as small as Rs.500 through SIPs or a large amount if you want to make lump sum investments in mutual funds.
A mutual fund investment has to be a long-term investment:
Another strongly held misconception about a mutual fund is that it is a long term investment option. Well, there is no denying that if you invest in mutual funds for long-term, you will reap the benefits of compounding, having said that, another fact remains that even if you need money sooner, you can choose to make an investment in mutual funds with the objective of reaping higher return than other asset classes. You can choose from a variety of mutual fund schemes based on your financial objective, risk-taking appetite, and affordability.
One Needs a Demat Account to make mutual fund investment:
In order to make investments in mutual funds, it is not necessary to have a Demat Account. You can buy mutual funds from fund houses or through distributors. However, having a Demat Account can prove to be very beneficial and convenient.
Mutual fund investment is tax-free:
A lot of investors have the misconception that mutual fund investments are tax exempt. A lot of marketers also use this myth as a selling point. The truth is that mutual funds that are subject to equity are truly tax-exempt under section 80c of the income tax act.
Investing in a mutual fund means investing in the stock market:
A general misconception amongst people is that if they make an investment in mutual funds, then it means that they are investing in the stock market. This statement is partly correct and partly wrong. There are many types of mutual funds, only equity mutual funds invest in the stock market and are highly volatile. The other category of mutual funds is debt mutual funds. These funds invest in government securities, bonds, and other secured investments. The fact remains that a mutual fund can be a combination of different mixes of debts, shares, and bonds.
Mutual funds offer guaranteed returns:
The truth is that mutual funds never offer guaranteed returns unlike secured investments such as fixed deposits. Hence most investors addicted to assurity shy away from investing in mutual funds. Where debt funds have a probability of delivering returns between the range of 5-15%, equity mutual funds can offer anything between -50% to 100%, and liquid mutual funds can give you returns between 6-8%. Mutual funds returns are hence never guaranteed. Depending on the mutual fund category there is a high probability of getting returns within a range.
Past mutual fund returns indicate future returns:
You will see a major chunk of investors actually believe that somehow looking at the past performance of a mutual fund can tell you how it will perform in the future. Hypothetically if this were true, every investor would be thick and rich. This myth is far from the truth. Past performance can talk about the legacy of the mutual fund, but it cannot by any means truly indicate how the mutual fund will perform tomorrow. This is why the market’s top performers don’t remain top performers always.
SIP can be done only on a monthly basis:
SIP can be done on a weekly, monthly or quarterly basis. Most investors prefer monthly SIP, but if you want to invest on a weekly or quarterly basis, those options are available. Most mutual funds give you this option, but some don’t give this option to investors.
Mutual funds are not for retired investors:
This statement is entirely false. There are many types of mutual fund suitable for retired individuals. As a retired individual, you can invest in steady debt funds and keep your hard earned money secured while you earn decent returns. You can also opt for an option that offers a monthly dividend. To meet your retirement goals you can also choose to invest in a debt-oriented fund with an equity component to get some return kick. Mutual funds are a great investment vehicle even to meet retirement needs.
SIP cannot be stopped once started:
Many investors avoid investing in mutual funds because they strongly believe in the myth that once they start the SIP payments, they cannot skip or stop at any point and will be faced with a penalty if they choose to stop their investments. However, this is not the case. The truth is that you can stop your SIP any time in between with just a single notification. Hence you don’t need to worry to start a SIP for the next 5, 10, 20, or 30 years.
Every time an investment is made in mutual funds documentation is required:
The first time you invest in a mutual fund, you will require first time documentation. After that every time you want to redeem, invest or switch you can easily do it online. Documentation needs to be done only if you need to change details like email Id, address, phone no, etc.
Mutual funds are not liquid:
Mutual fund investments are highly liquid. You can redeem your money instantly or within 3 to 4 working days depending on the mutual fund type that you have invested your money in.
The mutual fund needs the permission of the advisor or the broker:
Your advisor or broker does not have any control over your mutual funds. You can redeem your money on your own online or apply for redemption at the office of the fund house or KARVY/CAMS office. Your investment is completely in your hands and subject to your discretion.