Over the years, investing in mutual funds has emerged as a popular option among a vast population of investors with varied incomes and risk appetites as mutual funds have outperformed most investments avenues in last few years. However, there are many myths or misconceptions related to mutual fund investment which may result in a wrong investment decision.
There are various misconceptions which many investors hold while buying mutual funds. Here are the myths:
History will always repeat
Everyone who tends to invest in mutual funds first looks at the historic performance of the fund and then decides to make the investment. Therefore we can clearly say everyone feels the future performance will be linked to the previous performance and will fall in line. If future was based on past, every analyst would have made money thick & fast which is clearly a myth.
Lower the NAV, cheaper is my fund
Commonly believed that when the NAV is lower, the fund is cheaper and hence will provide higher returns. NAV is nothing but the current market value of the portfolio today. Older the fund, higher is the NAV as the market value grows over a period of time.
The investment has to be for very long-term
When someone suggests a mutual fund, the first question asked is whether it is “long-term ” investment. The fact is it’s good if you invest for a very long term, as you reap the benefits of compounding, but one who needs money sooner can also invest with a view of getting the better return than other asset classes. There are multiple schemes to choose from that suit different types of investors.
The investment sum has to be big!!
A common myth among investors is everyone feels one must have a large number of funds to invest in a mutual fund. But the ground reality is that you can start investing in a fund with as small as Rs 500 only.
One can add or subtract stocks according to their choice
There is a common myth in everyone’s mind that you can customise your portfolio, that is, one can add or subtract a particular stock from a fund if you want which is clearly not true as this feature is only available in PMS (Portfolio Management Services) and is outside the scope of mutual funds.
Mutual fund equals to no risk
Many mutual fund investors feel making investments in any scheme is risk-free and it is certain that it will perform around their expected mark, which is the reason regulators have made it compulsory for the fund runners to apprise the client about the risks of the investments. This acknowledgement is always made to you, when you sign the document of an agreement while investing, which is often missed by investors.
Investing in higher rated funds will fetch higher returns
People believe that the fund which has the highest ratings are safe and will give the best returns. The truth is mutual fund ratings are dynamic and are based on the performance of the fund at that given point. So, a fund that is rated highly today, may not necessarily maintain its high rating tomorrow and it also doesn’t guarantee a better performance going forward.
Dividend declared by mutual funds are windfall income
Mutual fund dividends are not windfall income as it is often projected to be. The dividend amount is paid out of investor’s own investment and hence, the fund’s NAV gets reduced by the amount paid as dividend. Moreover, the dividend amount is calculated on the fund’s face value, not the NAV. For example, assume that a scheme with a NAV of Rs 40 declares a 30% dividend. The dividend amount, in this case, would be Rs 3 (30% of Rs 10 face value) and the NAV of that scheme will come down to Rs 37 after the dividend record date.
Investing in a mutual fund for the purpose of availing dividends is a futile exercise, and not recommended. Instead, opt for the growth option of mutual fund schemes to benefit from the power of compounding effect.