Topic 3: Five Mutual Fund Myths That Need to Be Busted
These myths paint an unrealistic picture about investing in mutual funds. For a fair understanding, investors need to have the correct information.
1. You Need To Be An Expert To Invest In Funds
Investors often avoid mutual funds because they don't know much about them. The common refrain is, "I don't understand them". It is a fallacy that you need to be an expert to invest in mutual funds. In fact, mutual funds are the best options for people who don't understand investments. The investment is managed by professionals and the individual doesn't have to bother about how to pick stocks or when to buy and sell them. The fund manager does all the research and analysis for you. A good mutual fund adviser can help you choose a scheme that fits your risk profile and is suitable for your financial goal and investment tenure.
2. You Require a Large Amount to Invest
The second most common myth is about the quantum of investment. Many investors feel that to earn meaningful returns, they need to put in a large sum in mutual funds. That's not true. You can start by investing as little as Rs.500 per month through SIPs and gradually increase your investment as your income rises. If your fund earns annualized returns of 12%, even a modest sum of Rs. 2,000 a month can grow to Rs.20 lakh in 20 years. If you increase the investment by 10% every year, the corpus at the end of 20 years will be almost double at Rs.39.5 lakh. So, don't avoid investing because you have a small surplus today. Regular investing and a disciplined approach can help you build a huge corpus over time.
3. Mutual Funds Invest Only in Equities
Investors who do not know much about mutual funds often assume that funds invest only in equities. If the volatility of the equity market has kept you away from investing in mutual funds, you need to know that 66% of the assets under management of mutual funds are in debt mutual funds (as of 30th September 2016). Equity mutual funds comprise just 32% of the market. So, if you want higher returns and better tax treatment than fixed deposits, but aren't comfortable with the risk that comes with equity mutual funds, you can look at investing in debt funds. There are also balanced funds that invest in both equity and debt, and funds that invest in gold. So, you have a wide array of schemes to pick from.
4. You Can't Go Wrong with Five-Star Rated Funds
Even though past performance is no guarantee of future returns, the star ratings of funds by mutual fund trackers such as Value Research and Morningstar provide some idea to investors. However, do keep in mind that these ratings keep changing. A five-star fund could become a three-star or two-star fund based on its risk-adjusted performance and volatility of its returns. Also, the ratings themselves are no guarantee that the fund will not underperform. Ratings need to be paired alongside performance to get a suitable idea about a fund's prospects.
5. Sips Mean You Will Never Lose Money
Systematic investment plans (SIPs) are the best way to invest in equity funds because they reduce the risk and average out the investment costs. But some investors also believe that SIPs mean they cannot ever lose money. Cost averaging simply means that when the market falls and NAVs come down, the SIP investor buys more mutual fund units and when the markets are up, he buys fewer units. The average cost of purchase is obviously lower than the highest price paid for a mutual fund unit. But this does not mean that SIP investors cannot lose money. So, make a realistic assessment of the risk you are willing to take before putting money in equity funds—whether a lump sum or through SIPs.
Source: economictimes.indiatimes.com
1. You Need To Be An Expert To Invest In Funds
Investors often avoid mutual funds because they don't know much about them. The common refrain is, "I don't understand them". It is a fallacy that you need to be an expert to invest in mutual funds. In fact, mutual funds are the best options for people who don't understand investments. The investment is managed by professionals and the individual doesn't have to bother about how to pick stocks or when to buy and sell them. The fund manager does all the research and analysis for you. A good mutual fund adviser can help you choose a scheme that fits your risk profile and is suitable for your financial goal and investment tenure.
2. You Require a Large Amount to Invest
The second most common myth is about the quantum of investment. Many investors feel that to earn meaningful returns, they need to put in a large sum in mutual funds. That's not true. You can start by investing as little as Rs.500 per month through SIPs and gradually increase your investment as your income rises. If your fund earns annualized returns of 12%, even a modest sum of Rs. 2,000 a month can grow to Rs.20 lakh in 20 years. If you increase the investment by 10% every year, the corpus at the end of 20 years will be almost double at Rs.39.5 lakh. So, don't avoid investing because you have a small surplus today. Regular investing and a disciplined approach can help you build a huge corpus over time.
3. Mutual Funds Invest Only in Equities
Investors who do not know much about mutual funds often assume that funds invest only in equities. If the volatility of the equity market has kept you away from investing in mutual funds, you need to know that 66% of the assets under management of mutual funds are in debt mutual funds (as of 30th September 2016). Equity mutual funds comprise just 32% of the market. So, if you want higher returns and better tax treatment than fixed deposits, but aren't comfortable with the risk that comes with equity mutual funds, you can look at investing in debt funds. There are also balanced funds that invest in both equity and debt, and funds that invest in gold. So, you have a wide array of schemes to pick from.
4. You Can't Go Wrong with Five-Star Rated Funds
Even though past performance is no guarantee of future returns, the star ratings of funds by mutual fund trackers such as Value Research and Morningstar provide some idea to investors. However, do keep in mind that these ratings keep changing. A five-star fund could become a three-star or two-star fund based on its risk-adjusted performance and volatility of its returns. Also, the ratings themselves are no guarantee that the fund will not underperform. Ratings need to be paired alongside performance to get a suitable idea about a fund's prospects.
5. Sips Mean You Will Never Lose Money
Systematic investment plans (SIPs) are the best way to invest in equity funds because they reduce the risk and average out the investment costs. But some investors also believe that SIPs mean they cannot ever lose money. Cost averaging simply means that when the market falls and NAVs come down, the SIP investor buys more mutual fund units and when the markets are up, he buys fewer units. The average cost of purchase is obviously lower than the highest price paid for a mutual fund unit. But this does not mean that SIP investors cannot lose money. So, make a realistic assessment of the risk you are willing to take before putting money in equity funds—whether a lump sum or through SIPs.
Source: economictimes.indiatimes.com