Mutual funds are a lucrative investment option for those seeking capital appreciation over the long term. Nowadays more and more people are switching from conventional investment avenues to market linked schemes like mutual funds. As per historic data, mutual funds have surpassed all other conventional investment avenues like PPF and bank FDs, delivering twice as many returns. This doesn’t mean that mutual funds guarantee returns. Mutual fund investments are subject to market risks and all investors should bear that in mind before investing in them.
However, some myths are lurking among new investors who are skeptical about investing because of the several misconceptions they have about mutual funds. This article aims to bust these myths and will also attempt to state some facts about mutual fund investments.
Mutual Funds: Myths & Facts
Myth: Mutual funds are for professional investors
Fact: Mutual funds are an ideal investment for all types of investors. A lot of people with less knowledge invest in them because mutual funds offer active risk management. They have designated fund managers who are responsible for ensuring that they invest adequately across asset classes and money market instruments and shuffle the securities in accordance with the changing market cycles.
Myth: One should only invest in mutual funds for the long term
Fact: Although mutual funds like equity funds need investors to remain invested for the long run so that the scheme can perform to its fullest potential, there are some mutual fund schemes like debt funds which investors can consider investing to target their short term financial goals. There are debt funds like liquid funds whose underlying portfolio has a low maturity period of 91 days. Different types of investment schemes invest in different securities and investors depending on their investment horizon, risk appetite and investment objective should decide which mutual fund scheme to invest in.
Investors can even consider investing in Equity Linked Saving Scheme (ELSS) to avail tax benefits but need to know that this equity scheme comes with a three-year lock-in period.
Myth: All mutual fund schemes invest in the stock market
Fact: Mutual funds invest in equity and equity related instruments, government, and corporate bonds, as well as in money market instruments like commercial papers, certificate of deposits, call money, repo rates, treasury bills, CBLO (Collateral Borrowing and Lending Obligation), etc. Several of these investment avenues aren’t available for direct investment to retail investors, however, they can invest in these by investing in mutual funds.
Myth: Investing in mutual funds is only possible for those who have surplus capital
Fact: It is now possible to invest in mutual funds even with an amount as low as Rs. 500 per month. Thanks to the introduction of the Systematic Investment Plan (SIP) investors no longer need to make onetime lumpsum investments. A Systematic Investment Plan or SIP is a simple and convenient way of ensuring that you save and invest a fixed sum at periodic intervals in a mutual fund scheme of your choice till your investment objective is accomplished.
Myth: Without a demat account you cannot invest in mutual funds
Fact: An investor may have the compulsion of owning a demat account if they wish to invest in Exchange Traded Funds (ETFs). To invest in other mutual fund schemes, one need not have a demat account. Investors can store these units in a normal mutual fund account belonging to the AMC or third-party aggregator from whom they have bought mutual fund units.
We hope that through this article we have busted some of the most common talked about myths related to mutual fund investments.