Be it anything in life, misconception and myths come along. It is up to you that you filter and sieve the information as it suits. A careful assessment of the facts and information provided and its suitability according to your profile. If you have done proper planning and are invested towards your life goals, this can get a lot easier and rewarding. Mutual funds or any other form of investing, you need to be vigilant and get your facts clear and straight for them to work in your favor.
Here is a list of 7 myths and misconceptions that need to be busted in order to get your investment fundas clear;
- A huge amount is needed to invest in mutual funds
This is the biggest myth associated with mutual funds. gone are those days when you needed to have a huge or lump sum amount to invest in mutual funds, with the introduction of SIP or Systematic Investment Plan, investing in mutual funds has become quite easy and reasonable. There are a lot of funds which allow you to invest with as low as Rs. 500 or Rs. 1000.
Every time is the best time to invest in mutual funds. all you need is some five hundred to thousand odd rupees to start investing and later increase the amount as you have money at disposal. There is no point you wait for the right time to invest as market moves in cyclic phases which if is on a low time now, will be at peak in the coming time. Time is money, the sooner you start, the more you will make.
- Mutual funds mean long-term investment only
The next big myth is about the duration of the investment. Mutual funds come in all sizes and all forms of investments, different duration, and tenures of investments. There are investment options in mutual funds which are for the ultra-short-term, short-term and mid-term as well apart from the misconception of long-term being the only option. Mutual funds have been conceptualized keeping in mind different classes of investors who are willing to stay invested over different time periods. If you are a short-term investor, you can go for debt funds and for long-term investors, equity funds are the most preferable option.
Before you make the investment, you must consider your risk profile. There are two risk profiles with mutual fund investments, investor’s risk profile and investment’s risk profile. The two must fall in alignment in order to fetch maximum returns.
- Tax deduction is an embedded feature of all mutual funds
This is not true; a lot of investors invest in mutual funds thinking it will be eligible for tax deductions not knowing that all mutual fund investments are not eligible for tax deductions. Only Equity-linked Savings Schemes (ELSS) funds are eligible for tax deductions under the section 80C of Income Tax Act, 1961.
if you are aiming towards saving your money from taxation, you need to plan ahead of investing to make the best advantage of these investment avenues.
- Only equities are mutual funds
Mutual fund investing not only refers to equity investing but also to investing in investment instruments other than equities like money market funds, debt funds, hybrid funds, treasury bills, fixed income assets etc. also, equity mutual funds do not necessarily mean a 100% investment in direct equities. A lot of equity investments mean majority investment like 65% or 70% investment in equities and remaining in a mix of debt and money market securities. As per SEBI’s instructions, for a fund to qualify as an equity fund, there must be at least 65% investment in the direct equities in the market.
- Lower NAV means a cheaper mutual fund
NAV is not the right gauge to measure the value of a mutual fund. NAV or Net Asset Value has got nothing to do with the valuation of mutual funds. it is the only representative of the market value and not the market price of a fund.
Even if the NAV of a fund is higher for a longer existing fund and lower for a newer fund, you must choose the former one as it will have considerable historical data to be tracked and other relevant ratios to be benchmarked as compared to a new entrant in the market.
- Child plan of mutual funds will ensure 100% security and coverage
As an investor, you must understand the fact that all mutual fund investments are directly linked to and based on market performance. Be it a child plan or any other plan, the investments will suffer the same risk as any other normal investment in the market due to market volatility and corrections.
No plan can guarantee you a 100% coverage but you can always select your funds as per your needs and requirements foreseeable in the future. It is very important that you understand the risk and risk mitigation strategies to avoid any unwanted events.
- Diversification means a bucket full of different funds
No! that is not right. Portfolio diversification is a very important and sensitive aspect of investing. As much as it needs to be done, it is more important to do it correctly.
Diversification has been misconceived by a lot of people as stuffing in your investment portfolio with a large number of funds which is not true. Mutual fund diversification basically means having a mix of different types of funds in your investment portfolio which would allow you to have exposure across the market with different risk profiles.
Try to limit the types of funds in your portfolio to 4 to 5 funds meanwhile aligning them with your life goals.