What are the common myths about investing in mutual funds?
One of the biggest hurdles in the journey of Investing is getting over the myths that have no foundation. Mutual funds have proven to be a great instrument for long term wealth creation, however, there are many myths surrounding this instrument. In this article we bust some of the common Myths of Mutual funds.
#MYTH 1 – A Mutual fund with low NAV is better than a mutual fund with high NAV:
A new fund will generally have a NAV of around 10 Rs.
#Myth 2 – Mutual funds with good performance in the past are ideal investments:
Many people are under the impression that if a fund has given good returns in the past, they are likely to do so in the future. You need to understand that in investing; past performance is not an indicator of future performance, if that was true, we all would be investing in mutual funds and be rich.
#Myth 3 – NFO gives good returns:
NFO or new fund offer, as you know is the launch of a new fund. NFO’s are risky to investors as there are is no track record of the fund. An NFO should generally be avoided unless it comes out with a unique idea or different strategy for investors.
#Myth 4 – Dividends declared by Mutual fund companies are not additional income:
Many investors get confused with this and are easily fooled by mutual fund agents. Dividend in stock market and mutual funds are different concepts. In stock market, the company declares a dividend from the profit they earn, and you get an additional income. However, in mutual funds, dividend option does not mean you earn any additional return, it simply means withdrawing a part of your money.
For example, you invest 10 Lakh Rs in mutual funds and it becomes 12 lakhs in a years’ time, you will be given a dividend of 1,00,000 Rs and your NAV will be reduced. You are not earning any additional income; it is similar to withdrawing part of your accumulated profit.
#Myth 5 – Need a huge sum to invest:
Despite the growing amount of awareness and popularity among investors about mutual funds, many investors still are under the impression that they need a huge sum of money to invest in mutual funds. On the contrary, you can start your investment in mutual funds with a sum as low as Rs 500 and increase it according to your requirements.
#Myth 6 – Mutual funds are for experts:
Mutual funds are for the common man but managed by experts. It’s similar to driving a car, if you can know how to drive you can travel by yourself (invest in stocks directly) but if you don’t know how to drive a car, you take help of a professional driver (Invest in mutual funds)
#Myth 7 – All the money from ELSS can be withdrawn after 3 years if one is doing SIP:
One of the biggest myths of investors is that if they are doing SIP in ELSS (tax saving mutual funds) then they can withdraw the entire amount after 3 years. However, that is not true. Each SIP you make in ELSS is locked for a period of 36 months.
#Myth 8 – SIP can only be done on a monthly basis:
SIP can be done on a quarterly or weekly basis as well. Most of us prefer the monthly SIP as we get our income on a monthly basis, however if you prefer a weekly or quarterly SIP, even that is possible. However, it depends on different fund houses if they have that option, most of them do have it.
Bonus:
Many people discontinue their investments during a bear market or sell them. Well in a bear market, you should never discontinue your investments but rather invest more.