Articles Details

Myth Vs Reality

Mutual Fund is a popular and well-known investment tool. Still there are many myths doing round about mutual fund. Even some seasoned investors are known to believe in these myths. It is now time to bust these myths and let the reality be shown. Below find 5 myths about mutual funds and the reality vis-a-vis.

5 Common Myths about Mutual Fund Investments:

 (1) Investment in mutual fund (MF) is always risky: No, it is not. Mutual fund is not necessarily all about equity or stocks. Mutual funds also deal into debt instruments like Certificate of Deposits (CDs), Bonds, Govt. Securities (G-Sec.), Non-convertible Debentures (NCDs) etc. This means that a mutual fund scheme can also have all or some of these debt instruments in its portfolio. Different debt instruments have different maturity periods. MF schemes which are having debt papers of very small duration are least risky. Such schemes are known liquid MF schemes. These schemes can be as safe and as liquid as your savings bank a/c. Similarly carefully chosen particular type of debt MF schemes (like Accrual Funds or Medium Term Plan) can be as safe as fixed deposits along with better tax-adjusted return.

(2) Higher unit value (NAV) means a costly purchase: No, it does not. Let me give you an example. Suppose you asked me, the rate of inflation in last 2 financial years (FY) and I told you that in FY 2013-14 cost inflation index (CII) stood at 939, and in next two FYs CII values were at 1024 and 1081. Does it mean anything to you? No. It would have helped you instead if I had told you that in last two FYs rate of inflation were 5.57% (FY 2015-16) and 9.05% (FY 2014-15) – then the message is clear. So what matters is percentage of relative change and not the value itself as the base values in cases of both inflation (at 100) and mutual fund NAV (at 10) are assumed for ease of understanding and measurement. So look at yearly growth rate of a scheme’s NAV rather than NAV itself. If it’s consistently beating its benchmark return then it’s worth considering.

(3) Having many schemes in portfolio means diversification: Remember one fundamental advantage of a mutual fund scheme – the diversification that it offers. Say, I am investing directly into stocks of companies and with the money that I have, I bought two stocks. On the contrary, you are investing into MF. In that case with the same money that I have, you bought some units of MF scheme and that MF scheme’s portfolio might consist of many stocks, say, 30 stocks. So your investment portfolio is much more diversified than mine. Now when a single MF scheme offers me enough diversification, investing more into similar type of schemes will not make much sense. But I can surely buy some other type of schemes to get exposure into different types of investment styles.

(4) MF investment is mandatorily for long term: No, not necessarily. As discussed above one can keep money in liquid MF schemes also which is often used to park money for a very short term. There are other debt schemes (arbitrage fund, accrual fund, income fund) which can be held for short to medium term. Contact your financial advisor for the same and mention clearly about your investment horizon.

(5) MF investment cannot be used for regular periodical income: No, it can definitely be used. Like you can invest systematically, you can withdraw also from a scheme systematically i.e. withdrawing a fixed amount at a regular interval for a specified period or till the money lasts whichever is earlier. This is known as Systematic Withdrawal Plan (SWP). This is really helpful for retired people or for anyone who needs regular income.  

Share your thoughts on these or some other myths about mutual funds by commenting below.