Mutual fund myths busted: Being aware of the facts for informed investing

Mutual funds have gained immense popularity as an investment option for building wealth over time, yet they are often clouded by misconceptions and myths. In this article, we will debunk some of these myths and shed some light on the facts surrounding mutual funds. So, whether you are a seasoned investor or a novice exploring investment options – understanding the reality behind the myths will empower you to make informed investment decisions and enhance your financial potential.

Table of contents:

1. Myth 1: You need a large sum to invest in mutual funds
2. Myth 2: Mutual funds are riskier than shares
3. Myth 3: You must have a DEMAT account to invest in mutual funds
4. Myth 4: Mutual funds are available only for the long term
5. Myth 5: Mutual fund investments have a lock-in period and one cannot redeem investments easily
6. Myth 6: Mutual funds only invest in equity markets
7. Myth 7: You are too young to start investing in mutual funds
8. Myth 8: SIPs are best suitable for Equity Mutual Funds
9. Myth 9: Debt is better than equity
10. Myth 10: Know your customer (KYC) is needed multiple times for mutual fund investments
11. FAQs

10 mutual funds myths vs. facts

Let us have a look at mutual fund myths and facts about mutual funds.

Myth 1: You need a large sum to invest in mutual funds

Fact: One of the greatest advantages of mutual funds is that they cater to investors with various financial capabilities. Contrary to popular belief, you do not need a large sum of money to invest in mutual funds. Mutual funds offer the option of systematic investment plans (SIPs), allowing you to invest small amounts regularly. This makes it easier for individuals with modest incomes to participate in the market and benefit from long-term wealth creation.

Myth 2: Mutual funds are riskier than shares

Fact: Like any investment, mutual funds carry a certain level of risk. However, it is a misconception to believe that mutual funds are inherently riskier than individual shares. Mutual funds provide diversification by pooling investments from multiple investors, spreading the risk across a portfolio of different securities. The diversification helps to mitigate risk and provide a relatively better return potential over long term compared to investing in individual stocks.

Myth 3: You must have a DEMAT account to invest in mutual funds

Fact: Unlike stocks, which require a DEMAT account for trading, investing in mutual funds does not necessitate a DEMAT account. Mutual fund units are held and managed by the fund house or asset management company. Investors can simply open an account with a fund house or invest through various platforms and intermediaries without the need for a DEMAT account.

Myth 4: Mutual funds are available only for the long term

Fact: While mutual funds are indeed an excellent vehicle for long-term wealth creation, they also offer options for short-term and medium-term investment goals. Depending on your investment objective, you can choose from a variety of mutual fund categories that align with your time horizon and risk tolerance. These categories include equity funds, debt funds, hybrid funds, and more, each catering to different investment durations.

Myth 5: Mutual fund investments have a lock-in period and one cannot redeem investments easily

Fact: Unlike some specific investment options, most mutual funds do not have a lock-in period. Investors have the flexibility to redeem their mutual fund units whenever they desire, subject to terms and conditions. While some funds may have exit loads for early redemption, most funds offer liquidity and the freedom to exit as per the investor's convenience.

Myth 6: Mutual funds only invest in equity markets

Fact: While equity funds are a popular category of mutual funds, it is incorrect to assume that all mutual funds solely invest in stocks. Thus, mutual funds offer a wide range of options, including debt funds, which invest in fixed income securities like government bonds and corporate debentures. Additionally, there are hybrid funds that combine equity and debt investments, providing a balanced approach to wealth creation.

Myth 7: You are too young to start investing in mutual funds

Fact: Age should not be a barrier to starting your investment journey. In fact, starting early can be advantageous due to the power of compounding. Mutual funds offer investment options for individuals of all ages, including young investors. By investing early, you give your money more time to grow, potentially increasing your long-term return potential.

Myth 8: SIPs are best suitable for Equity Mutual Funds

Fact: While SIPs are commonly associated with equity mutual funds, they can be employed across mutual fund categories. SIPs allow investors to invest a fixed amount at regular intervals, ensuring a disciplined investment approach. This strategy can be equally beneficial for debt funds or hybrid funds, offering the advantage of rupee-cost averaging and mitigating the impact of market volatility.

Myth 9: Debt is better than equity

Fact: Comparing debt and equity as investment options is subjective and depends on an individual's financial goals, risk appetite, and investment horizon. Debt funds primarily focus on generating income and mitigating impact on capital, making them suitable for conservative investors. On the other hand, equity funds aim for long-term capital appreciation, with potentially higher long-term returns but also higher volatility. It is essential to align your investment choice with your risk tolerance and financial objectives.

Myth 10: Know your customer (KYC) is needed multiple times for mutual fund investments

Fact: Once you have completed the KYC process with any registered intermediary, such as a mutual fund distributor or a KYC registration agency, you do not need to repeat the process for every mutual fund investment. Your KYC details are valid across all mutual fund investments and intermediaries, simplifying the investment process and eliminating the need for repetitive formalities.

Conclusion:
In conclusion, mutual funds have emerged as a popular investment avenue, but misconceptions can hinder potential investors from reaping the benefits. However, by dismissing these myths and understanding the mutual fund facts, investors can make informed decisions and leverage the potential of mutual funds for long term wealth creation. Remember, seeking the assistance of a financial advisor or distributor can provide valuable guidance tailored to your specific investment needs.

FAQs:

Is it true that mutual funds always provide guaranteed returns?

No, mutual funds are subjected to market risks. The performance of any mutual fund also depends on the investment philosophy, investment decisions and market conditions. And hence, the returns cannot be guaranteed.

Do mutual funds always outperform individual stock investments?

Mutual funds operate in the same market as individual stock investments. However, professional fund management and diversified investing are some of the advantages that mutual fund provide to investors. Hence, mutual funds may or may not outperform individual stock investments.

Are all mutual funds subject to high fees and expenses?

Not all mutual funds have high fees. These charges vary and hence it becomes extremely important for investors to learn about the expense ratios before investing.

Can mutual funds be used as a tax efficient investment option?

Yes, some mutual funds are structured in a way that they help investors manage taxes accordingly. Equity Linked Savings Scheme (ELSS) is one example of a scheme where tax exemption is available. However, it is important that investors consult financial advisors for tax guidance.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.

This document should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.