Mutual funds (MFs) have been a consistent way to start creating wealth. As per the Association of Mutual Funds of India (AMFI), Indian Mutual Fund Industry grew from ₹9.75 trillion in June 2014 to ₹61.16 trillion in June 2024, representing a more than 6-fold increase in 10 years. This translates to approximately a 528.82% increase over the 10 years.
This data shows the increasing adoption of MFs by investors over the last decade. Yet, MF are often misunderstood. So, busting the myths around them is important for early investors. So, let’s dive in.
Myths About Mutual Funds
Mutual funds are risky. They are only for the rich. You need a Demat account to start a mutual fund. Are these myths of facts? Let’s find out.
Myth 1: You Need To Be An Expert To Start Investing In Mutual Funds.
Fact: Contrary to the belief that you need to be a financial guru to invest in mutual funds, they are designed for everyone. Fund managers are responsible for managing investment portfolios for their investors.
For example, take a school teacher who wants to start investing. By choosing a mutual fund, he/she can use the expertise of fund managers who analyse market trends and make informed decisions based on those trends. So, now everyone investing in the fund can benefit from from the fund manager’s expert decisions without the need to become a stock market expert.
Myth 2: Mutual Funds Are For The Rich.
Fact: With options like Systematic Investment Plans (SIPs), you can begin investing with as little as ₹500. Imagine a young professional earning a modest salary; by setting aside a small amount monthly, they can gradually build their own portfolio. Thus, proving again that mutual funds are for everyone, regardless of their financial status. You don’t need a fortune to start investing in MFs.
Myth 3: Mutual Funds Are Risk-Free.
Fact: While mutual funds usually offer diversified portfolios that manage risk, they are not completely risk-free. The performance of MF depends on the underlying assets and all investments carry some level of risk.
For instance, during a market downturn, an equity fund could experience a decline in value. However, the diversification within a MF can help cushion against drastic losses, making it a safer bet than putting all your money in single stocks.
Myth 4: Mutual Funds Only Invest In Stocks.
Fact: A common misconception is that mutual funds only contain stocks. In reality, MFs can hold a variety of assets including bonds (government securities and corporate bonds), money market instruments, gold and real estate. This gives you a variety of MFs to choose from whose portfolios are created for varying risk tolerances and investment goals.
Myth 5: Higher NAV Means Better Performance.
Fact: The Net Asset Value (NAV) of a mutual fund does not indicate its quality or performance. NAV is simply the per-unit price of the fund’s assets minus liabilities. For example, whether you invest in a fund with a NAV of ₹10 or ₹100, what matters is the percentage change in NAV, not the absolute value. Two funds can have different NAVs but still provide the same percentage returns if their underlying assets perform similarly.
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Myth 6: Mutual Funds Offer Guaranteed Returns.
Fact: Investing in mutual funds does not guarantee returns. The performance of a mutual fund is tied to the market conditions and the performance of its underlying assets. For instance, if a fund invests in high-growth sectors like technology, its returns could be high in a booming tech market. Conversely, if the market dips, the fund’s performance might falter. So, it’s important to understand that market dynamics influence MF returns.
Myth 7: You Need A Demat Account To Invest In Mutual Funds.
Fact: You do not need a Demat account to invest in most mutual funds. While Exchange-Traded Funds (ETFs) require a Demat account because they are traded like stocks, traditional MFs can be bought directly from asset management companies (AMCs) and do not require such an account. For example, an individual interested in securing their savings can easily invest in a mutual fund without the need for opening a Demat account, simplifying the investment process.
Myth 8: It’s All About Timing The Market.
Fact: Investing in mutual funds is less about timing the market and more about time in the market. For instance, rather than trying to predict market highs and lows, a regular monthly investment makes sure you buy more units when prices are low and fewer when prices are high, thus optimising your investment over time. This is also known as rupee cost averaging, which smoothens the purchase prices over time and reduces the impact of market volatility.
Myth 9: All Mutual Funds Are The Same.
Fact: There are a variety of mutual funds available, each made for different investment goals and risk levels. From equity funds aimed at comparatively faster growth to conservative liquid funds for short term needs, the variety is extensive. You could choose a balanced fund for a moderate level growth with controlled risk, showcasing the diversity and preferences available within MFs.
Wrapping Up
Now you know more about mutual funds and the myths and facts around it. With benefits like diversification, power of compounding, rupee cost averaging and low minimum investment, MFs are a smart and easy way of investing. With so many different types of funds available, there is something for everyone’s financial goals.
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DISCLAIMER: Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. Investments in securities market are subject to market risks. Read all the related documents carefully before investing. The securities quoted are for illustration only and are not recommendatory.
