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Myth Busters

MYTH #1: Mutual Funds are for market savvy investors who prefer stocks

THE FACTS…

Quite the opposite!

Mutual funds invest not just in shares but also in Government Securities, Commercial Papers, Corporate Bonds, Money Market Instruments, Debt Market Instruments, etc. Market savvy investors would prefer managing their investments themselves and invest in each of these instruments separately.

On the other hand, mutual fund investments are managed by professional fund managers and market analysts who have the knowledge, skills and expertise to take investment decisions. Once you invest in a mutual fund, these experts, for all practical purposes, manage the corpus of the schemes!

Imagine investing directly in the stock market. You would be required to monitor/track various stocks/ sectors and analyze their growth potential. The critical decision to buy and/or sell can be governed by many factors and one mistake can cost you dearly. With mutual funds, you don’t have to worry about monitoring or analyzing individual shares.

Another benefit is diversification. If you look at a diversified equity scheme, then you would notice the companies the scheme invests in. If you were to manually invest in all those companies and track their performance, it would be highly time-consuming, to say the least.

MYTH #2: Investing in schemes with lower NAVs can generate good gains

THE FACTS…

The Net Asset Value is simply the price at which a unit of a particular scheme can be bought or sold. So, investing in schemes having a NAV of ₹50 or ₹500 is nowhere related to the gains you can expect from your investment. What matters is the rate of return, the performance record and volatility of the scheme.

MYTH #3:If a fund announces dividends, then it is a good time to buy

THE FACTS…

Dividends are announced based on the income collected by the fund from its holdings. This income is retained within the fund until it is paid out to the unit holders and reflects in the NAV of the scheme. When the dividend is paid out, the NAV drops reflecting that change. Hence, investors don’t gain anything by timing the purchase. Let’s understand this with the help of a simple analogy:

A Mutual Fund scheme has a total value of Rs. 10 lakh and 100,000 units (NAV Rs.10 per unit). It collects earnings of Rs. 50,000. Therefore, its NAV rises to Rs.10.5. At this stage, the scheme announces dividends and you decide to purchase one unit. When the dividend is paid out, the money comes out of the fund and is reflected by a drop in the NAV. Hence, the scheme distributes a total dividend of Rs. 50,000 bringing the NAV down to Rs.10.

MYTH #4: Sell when the NAV is high and invest in schemes with low NAVs

THE FACTS…

When you buy a share, you track the share price and sell when it rises to a certain level above the purchase price.

Mutual funds, however, are different as compared to shares. The NAV of a mutual fund is the value of the scheme’s assets minus its liabilities, divided by the total number of units. A high NAV does not mean that the fund will offer great returns and neither does a low NAV mean otherwise.

Investment or redemption decision may be taken based on the performance of the scheme. Look at parameters like the percentage returns offered, volatility, etc.

MYTH #5: Mutual fund investments are all about timing

THE FACTS…

Should you buy when the NAV of a scheme is low or wait for it to drop further? How do you find the right TIME to invest?

Most investors face this dilemma before investing. However, most attempts to time the market are met with disaster and investors are usually advised against it. Opt for a Systematic Investment Plan (SIP) or a Systematic Transfer Plan (STP) and benefit from the Rupee Cost Averaging of your investment.

In a SIP, you invest a fixed amount at regular intervals. When the markets are high, lesser units are purchased and when they are low, the number of units purchased is higher. Over a long investment window, the cost averages offering a lower overall purchase price.

In a STP, you invest lump sum in a debt/liquid/ultra-short-term fund and regularly transfer fixed amounts to an equity fund. It also helps in Rupee Cost Averaging.

MYTH #6: Mutual fund performance is stock-market dependent

THE FACTS…

One of the positive aspects of investing in a Mutual fund scheme is diversity. Typically, an equity mutual fund scheme invests in more than 20 stocks. Hence, even during a bearish market cycle (where the prices of most stocks are regularly falling), the mutual fund scheme could have a few stocks performing well. Also, for investors who are weary of the stock market volatility, choosing a balanced scheme (having both equity and debt investments) is a better option.

Further, since Mutual Fund schemes are managed by professional fund managers, they regularly review the performance of the portfolio and switch the low/non-performing assets with return-generating ones. Depending on the asset allocation of the scheme, the fund managers choose assets that help to achieve the investment objectives of the scheme.

MYTH #7: Not just equity, but debt funds are also affected by the stock market

THE FACTS…

Debt schemes aim to offer stability to your portfolio by taking lower risk with the capital. These schemes typically invest in corporate bonds, debentures, treasury bills, government securities and other such fixed income instruments. Hence, direct impact of the stock market volatility is lower as against Equity schemes.

MYTH #8: I am too old for Mutual funds. It’s a market for the young.

THE FACTS…

While age does play a huge role in determining the risk preference of an investor, it is not the sole deciding factor for investment in mutual funds. There is a plethora of schemes available in the market which cater to investors with varying risk appetites and time horizons.

While a young investor usually prefers to take more risks because of the longer time horizon available for investment, an older investor can opt for balanced funds which have a relatively lower risk exposure.

MYTH #9: Dividend Pay-out/Growth it’s all the same

THE FACTS…

No. In a dividend pay-out option the dividend declared by the scheme is paid out to the investor. On the other hand, in a growth option it is retained in the scheme and is reflected in the Net Asset Value (NAV) of the scheme.

While in both the cases, you receive benefits from the profits made by the scheme, the dividend pay-out option offers regular cash flow (based on the availability of distributable surplus), while the growth option gives you a compounded benefit through a higher NAV.

MYTH #10: Investment in mutual funds carry a higher risk than the stock market

THE FACTS…

A mutual fund invests in a wide array of equity and/or debt instruments as defined in its investment objective. The fund manager selects stocks meticulously to minimize the risk and maximize diversity. This makes investment in mutual funds less risky than direct investment in stocks.

MYTH #11: Investing in mutual funds locks your capital

THE FACTS…

Not completely true.

Mutual funds can be divided into two broad types based on the ability to buy and sell them as needed: Open Ended schemes and Close Ended schemes.

In close ended schemes, an investor can usually invest during the NFO and exit only on maturity. However, these schemes are also listed on stock exchanges where they can be bought/sold.

In open ended schemes, an investor can buy/sell units on any business day, directly with the Mutual Fund house.

Equity linked savings schemes (ELSS) offer tax benefits and have a statutory lock-in period of three years.

MYTH #12: You should sell MF units when the markets are high

THE FACTS…

It is advisable not to follow any such rules.

There are three primary pillars of successful investing:

  1. Defining your financial goals
  2. Understanding your risk preference
  3. Being clear about the time horizon of investments (long term/short term)
  4.  

    Once you make investments based on these three guidelines, you should try and stick to your investment plan and not get easily swayed by the performance of the assets.

    When the markets are high, many investors feel tempted to sell the units and book profits. While this may seem like the logical thing to do, it can make you stray away from your investment plan. You can talk to an investment advisor for liquidating a part of your portfolio, but it is always recommended to stick to your plan and achieve your financial goals.

MYTH #13: You should buy MF units when the markets are high

THE FACTS…

Refrain from the urge of timing the market. An erroneous decision can prove costly. Rather invest regularly and benefit from Rupee Cost Averaging. You might want to consider Systematic Investment Plans (SIPs) or Systematic Transfer Plans (STPs).

MYTH #14: You need to be rich to invest in Mutual Funds

THE FACTS…

Quite the contrary again.

Mutual funds are designed to help investors create wealth over long term. There are schemes which offer investments as low as Rs. 100 per month (SIPs). Even lump sum investments are permitted as low as Rs. 100. Mutual fund is a vehicle that can be used by all to meet financial goals.

MYTH #15: Mutual funds are not for the traditional and conventional investors

THE FACTS…

Untrue.

The wide array of schemes offered by the fund houses caters to the investment needs of all kinds of investors. There are debt schemes and balanced schemes which can work well with conservative and traditional investors. A small exposure to equity can actually help boost returns while the heavier debt component can provide stability to the portfolio.