Mutual Funds are a convenient way of investing in the stock market and creating wealth. However, people often get carried away by the misconceptions revolving around them and refrain from exploring this investment instrument.
In this article, we will bust 10 common myths to give you a fair understanding of the investment instrument.
Related reading: All you need to know about hybrid funds
- You need to be a finance pro to invest in it
Investors often avoid Mutual Funds thinking that it requires expertise to invest in them. Mutual Funds are managed by fund managers who do the heavy lifting of researching, buying and selling securities on your behalf.
- You need a large sum to invest
If you thought you needed loads of money to start investing in Mutual Funds, you were wrong. You can even invest a sum as little as Rs. 500 through SIPs or a few thousand rupees for lump sum investments.
- Demat account is essential
While a demat account could prove to be beneficial, it’s not a must have to invest in Mutual Funds. You can invest through distributors or by buying funds from fund houses.
- Highly rated schemes perform better
Research and ratings agencies assign scores to Mutual Funds based on their performance. While these scores are a measure of a fund’s success, they’re not predictors of future returns. The scores only give you an understanding of the past performance of a fund. Ratings can also change with time, and even a high-performing fund can underperform in the future.
- Returns are guaranteed
Mutual Funds are market-linked, thus their returns are not guaranteed. With its underlying assets ranging from high-risk equity to government securities, the funds are exposed to the ups and downs of the markets and the macro-economic scenario. Returns from even debt Mutual Funds (which invest primarily in fixed income securities) can fluctuate.
- No scope for short-term profit
Long-term investments in Mutual Funds help earn the best returns as equities are known to give high inflation adjusted returns in the long run. Also long term investments help in riding past market volatility. However, this doesn’t mean that you can’t earn short-term profits. Funds that invest in short-term money market securities can help you fulfill your short-term goals.
- Must buy low NAV funds
The size of a fund’s NAV does not indicate its return generating capacity. You must pick a fund based on its past performance, future prospects, costs and fund management rather than its NAV.
- Buy and ignore the fund
A fund requires regular monitoring and revising based on market movements. So, as an investor you must keep an eye on the market and rejig your portfolio as and when required.
- It is restricted to the domestic market
If you thought Mutual Funds only allow you to invest in the domestic market, you were wrong. In fact, international Mutual Funds allow you access to foreign markets. Some of the best-performing funds in 2016 were those investing in emerging markets such as Brazil.
- Past determines the future
Past performance of a fund doesn’t indicate future returns. The performance of a fund varies based on several market conditions and is thus subjected to change.
Mutual Funds are one of the best ways to invest, whatever your age, risk appetite or investment goal. You have the option to invest for conservative returns in debt Mutual Funds, or go for aggressive growth through equity Mutual Funds.