Mutual Funds are an ideal tool for investments, preferred by millions, not only in India but across the globe. They come in different types, and an investor can select from these types based on their risk profile, expected rate of return and the intended period of the investment. In India, mutual funds investments are picking up the pace very quickly.

However, a majority of the population in India still prefers traditional investments, which offer security of the principal amount and assured, but lower returns. Investors avoid investing in mutual funds primarily due to lack of awareness and of course, some myths that continue to surround them. These myths are widely prevalent among the masses of India which are yet to take a closer look at the financial markets. Here are some of the myths surrounding mutual funds that we’re going to demolish.

  1. Myth: Mutual Funds are very risky

Some investors share a perception that Mutual Funds are very risky, and their capital may get eroded entirely. This isn’t true. At the same time, mutual funds also aren’t entirely risk-free.

Fact: Mutual Funds do involve risks

Mutual Funds invest the money collected from the investors into equity and debt markets. Equity shares are traded regularly in stock exchanges and undergo price fluctuates frequently. Even the value of debt instruments changes on a regular basis due to interest rate fluctuations. These price changes directly affect the NAV of the Mutual Funds and have some potential downside risk as well. But the risk is generally not worrisome, as over the long-term equity and debt markets have historically remained stable.

  1. Myth: Mutual Funds involve heavy investment

The myth that investing in mutual funds require large sums of money discourages masses from investing in the most preferred form of investment.

Fact: Investment in Mutual Funds can be started with a minimal amount

Most mutual funds require only Rs 5000 as the initial capital to begin with, with minimum additional investment being Rs 1000. If investors go the SIP (Systematic Investment Plan) route, they can begin with as low as Rs 500 every month. For example, the large cap fund from investing online reliance mutual fund offers monthly SIP investment options for as low as Rs 100.

  1. Myth: Higher rated Mutual Funds are better

Investors often select funds based on their performance and ratings. They prefer investing only in top rated funds and would stay away from the underrated funds. This is understandable, but

Fact: Top rated funds can’t guarantee the same performance

Often, historically high performing funds haven’t been able to achieve the same returns. This is due to multiple reasons – like churning of the portfolio, change of the fund manager and management, and just general market conditions. Selecting funds based on their past performance alone can be a deceptive way of choosing funds for investment. Always keep an eye out for other factors.

  1. Myth: You must have expert knowledge of the markets before investing in mutual funds

There are many who don’t invest in mutual funds because of the myth that it requires an in-depth knowledge of the markets, and experience/expertise as an investor.

Fact: Mutual Fund investment requires layman knowledge

Mutual Funds are professionally managed by highly qualified and experienced fund managers. Investors just need to have some basic, essential awareness about how they work, the risks involved, and if their mutual fund pick aligns with their personal wealth goals before investing.

  1. Myth: Mutual Funds must be invested for a long term

A widely prevailing myth is that mutual funds cannot be redeemed in the short term, and that investors must hold the investment for the long term.

Fact: Investment in Mutual Funds can be done from short term basis to long term basis

Mutual funds, just like equity shares, can be redeemed at any time except for some funds (like ELSS) which have a mandatory lock-in period of 3 years. Debt fund categories like overnight funds, ultra-short duration funds, liquid funds, short duration funds have tenures like 1 day, 90 days, 365 days as well.

  1. Myth: Dividend option is better than Growth option

 People naturally prefer to receive regular income in the form of dividends, and typically go for the dividend option in the mutual funds they pick over the growth option. Ultimately, this has led to a widespread belief among the investors that it is better to opt for dividends than growth.

Fact: Growth option can be a lot more beneficial than the dividend option in the long term

A fund declaring dividend must pay Dividend Distribution Tax (DDT) of 10% post April 1, 2018, while investors must pay tax on the gain on sale of equity-oriented funds only on the threshold amount of Rs 1 Lakh or more. Retail mutual fund investors can benefit by choosing the growth option over dividend. Additionally, in the growth option, the fund reinvests the dividend which it would have paid out to investors. Thus, the power of compounding comes into play, ensuring the growth option will achieve higher returns over the dividend option.

Busting these myths and better understanding mutual funds could bring in more transparency, and therefore more potential investors into the markets. Higher cash inflows due to additional investments could also help in strengthening not only the liquidity and mutual fund industry, but also the nationwide stock exchanges and the market. This is already happening as more people begin to look at mutual funds more seriously. It’d be prudent to not get left behind.

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