8 Misconceptions about Mutual Funds!!
I have already explained what a Mutual fund is here. But one tends to have a lot of confusion as to what they can and cannot do. Below we will discuss the 10 most common misconceptions about Mutual Funds that people have.
Mutual funds need a huge initial investment:
This is completely false, the truth is completely different. Mutual funds can be started with as low as INR 500, as an initial investment. Not all of them fall into this category but most of them offer this facility. This has been done to increase the penetration of funds to the Tier-3 cities and other rural areas of India.
Tip: It’s better to start with a goal in mind and start investing accordingly. A random number won’t do you much good.
Investing in Mutual Funds will allow for tax deduction:
Not all of them have this option, only a few fund categories like ELSS or the Equity Linked Saving Scheme offer tax deductions under section 80C. ELSS have a fixed lock-in period of 3 years, meaning one cannot withdraw funds for 3 years after investing. This allows the fund to grow and give you better returns. Also, it gives the fund manager a definite time frame, so he knows perfectly well how he is supposed to invest your money and for how long.
Tip: Invest in Open ended schemes, so that you invest in an ever growing fund.
Mutual Fund for Long term?
It is true that if you stay invested for long then you are in a better position of making a profit out of your investment but that doesn’t necessitate you to stay invested for a longer tenure. You can withdraw your funds anytime, you can also stop the SIP and redeem your entire corpus. If you wish to stay invested for a short time, say 1 year then you are free to select that option at the time of starting the SIP.
Tip: For the short term, I would suggest you go for a debt fund, and for a long term an equity fund.
Mutual Funds only invest in Stock market:
There are various types of funds in the market, some are equity focused and some are debt focused. It is not necessary for a fund to invest in the stock market. If you wish to have an assured return, at a lower value then you can opt for debt mutual funds.
Tip: When you are young, you tend to have higher risk capacity. So invest more in equity. For a fund to be classified as equity, it has to have at least 65% of its assets in equity exposure. Your portfolio should be exposed to equity in the following equation:
Percentage Equity exposure = 100 – Your age
Mutual Funds offer guaranteed turns:
No scheme can offer a guaranteed returns. As they specify in the official documents that all the fund performances are market-related, so their returns may vary with time.
Thematic funds are better than other funds:
Thematic funds are basically investing in companies that follow a particular theme, say Automobiles or Banking. It is not necessary that since they are a much more focused group, they would perform better. Of course, it has its own benefits as well. If any law or regulation is passed that would benefit the banking sector for example, then for sure these funds would perform better. But to make such forecast is not possible, so a deep study and understanding fo the market is necessary to make such predictions. If you are not confident, it is always better to invest in diversified mutual funds.
More funds means more Diversification:
If you start investing in more mutual funds in order to attain more diversification, then I must say that all you will achieve in doing is confusing your own self while keeping a track of all the transactions. A well-selected individual fund generally invests your money in at least 40 companies. This is more than enough to safeguard your investment against fluctuations.
Tip: Invest in funds with a long and decent track record. Look for blue chip funds, since they invest in industry heavy-weights like Wipro and Infosys, they tend to perform better in the long run.
Buying stocks directly is much better:
It can be considered better if you have the time and expertise to know which stock to choose from. Since mariners do not have that time or knowledge, it is better that they invest in MFs. The risk factor is much higher in stocks if you pick a wrong one you would end up losing a major portion of your investment in no time.
Tip: If you still wish to buy, then go for A-List companies, with a stable annual report. Sites like money control do offer these details.
Read more about it here.