Mutual Fund Myth Buster
Mutual Funds are one of the most suitable investment instruments for investors. Here we bust some misconceptions that have led the investors to remain skeptical about them.
To give a fair and real understanding about the instrument, here are some facts about Mutual Funds:
1. Myth: “You need to be an expert to invest in funds”
Fact: Mutual Funds are managed by Fund Managers. You can either have an active fund where they actively buy and sell stocks or a passive fund that follows an index. The fund mangers do all the research and analysis about which securities to buy or sell. Further, online and offline advisors can easily help you choose the right Mutual Funds that work within your risk constraints to meet your goals. Yes, you have to be a diligent on who you choose as an advisor but it is easy to find a good one. Ask two simple questions – do you pay the advisor directly? and has the advisor successfully managed money before? If the answer is “Yes” to both the questions, you have made a good choice.
2. Myth: “You require a large amount to invest”
Fact: Th e minimum amount to be invested in a mutual fund is low with some funds allowing minimum investments as low as Rs 100 a month. Small investments can still add up over time. A 20 year old investing Rs 500 a month can build a Rs 59 lakh portfolio by the time they retire at age 60 (assume 12% rate of return). The right comparison is how much more can you earn by investing in Mutual Funds over an FD. Mutual Funds should be seen as a saving an investing instrument for everyone and not just for the rich. Remember, regular investing and a disciplined approach can help you increase your corpus substantially over time.
3. Myth: “Mutual funds invest only in equities”
Fact: Mutual Funds work within the constraints of the funds stated objective and risk tolerance. A long term fund with a high risk will mostly invest in equities where as a short term fund with low risk will consist mostly of debt securities, such as Government Securities, Bonds and other fixed income instruments. Investors have a wide array of schemes to pick from which cater to their risk appetite. There are equity funds, debt funds, Hybrid/ Balanced funds, which have both—debt and equity exposure and also mutual funds that invest in gold. As of 30th September 2016, 66% (32%) of the assets under management of mutual funds are in Debt (Equity) mutual funds. All mutual funds do not invest in equity markets. You can choose a fund keeping in mind your risk appetite and financial goal.
4. Myth: “Guaranteed expected returns with highly rated funds”
Fact: A mutual fund’s rating indicates the fund’s historical risk-adjusted performance over a period of time. The stars are assigned according to the percentile in which the mutual fund falls. Since this is a historical assessment, assuming the future performance of the fund on such basis is not reliable. The ratings are dynamic and change easily. In that sense, a fund rating system is different than the rating system on Amazon or travel websites and should be treated as such. For example, there is no evidence that 5 star rated funds have better future performance than 3 star rated funds. Ratings need to be paired alongside with other aspects like the stability of the fund house, fund category (Equity, Income, Hybrid), and the investors own risk appetite and goals.
5. Myth: “SIPs never allow you to lose your money”
Fact: Systematic Investment Plans (SIPs) are one of the smartest ways to invest in mutual funds. It reduces the risk and averages out the investment cost to make investing more conducive to investors. SIPs allow the investor to buy more mutual fund units when the market falls and NAVs come down, and fewer units when the markets are up. 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. SIPs also give lower returns than lump sum investments in a rising market. When you invest in SIPs, you invest for the long-term. Thus a rising or falling market for a few months or a year should not alter your plan significantly. So, make a realistic assessment of the risk you are willing to take before putting money in equity funds—whether as lump sum or or through SIPs.
Investing in mutual funds is a smart way for investors to generate good returns. It gives you the opportunity to possess hundreds of stocks through the pooled resources of many investors. But due to the above myths, either investors miss good investment opportunities or makes wrong decisions. Make sure you are aware of the right facts about Mutual Funds before finalizing your investments.