Mutual Funds Myths
Know more about Mutual Funds & Investments. Get valuable information on how to make investments and take a wiser decisions. Be it wealth creation, planning to buy a home, tax saving or systematic investment plan, get the ins and outs of everything.
Myth 1: I am still young; I do not need to start saving so soon.
Reasoning: Delay means substantial opportunity loss.
“Time and tide wait for no man.” – Geoffrey Chaucer, British Poet Your dreams and life goals are born early, so why shouldn’t your investments? The opportunity that time presents, if lost, is a greater loss than one can imagine. In addition, investing early results in a vastly greater compound of wealth than a tardy investment can ever build. You can start investing with a small amount without even altering your lifestyle. So make investments a habit and save for your future early!
Compare Mr. Young and Mr. Old’s investment results, with the help of this graph:
Myth 2: I can’t give my hard-earned money to Fund Managers; I can manage my own portfolio.
Reasoning: Managing on your own may not be worth the risk.
“Our knowledge is the amassed thought and experience of innumerable minds” – Ralph Waldo Emerson, Essayist
The primary advantage of investing in Mutual Funds is the professional management of your money. By investing in Mutual Fund, in lieu of individual stocks or bonds, your risk is spread out. Mutual Fund investors benefit from diversification without investing large sums of money that would be required to create an individual portfolio, thereby also staying afloat during market downturns. So stay secured, stay benefitted with the expertise and diversification of Mutual Funds!
The graph below will help you see the benefit of diversification :
Myth 3: Life is short; and I want short-term returns.
Reasoning: Should you cash out during crisis?
“One can always trust time. Insert a wedge of time and nearly everything straightens itself out.” –Normal Douglas, British Author
While setting short-term investment goals, it is important to take into account the predictability of returns on the investment. Returns on short-term investments are rather unpredictable. There are some occasions when returns can even go into the negative. As the time period increases, the chances of receiving negative returns reduce. For instance, negative returns in a 5-year investment will be less than in a 1-year or a 2-year investment. You can thus imagine getting more positive returns in a longer period. Long-term investing will also improve predictability.
Go through the graphs below to understand further:
Myth 4: ULIP is better than Mutual Fund; it gives insurance too!
Reasoning: ULIP gives cover but at what cost?
“Compromise makes a good umbrella, but a poor roof.” – James Russell Lowell, American Poet, Critic and Editor
If you’re looking for returns, then invest. And if you’re looking for protection, then insure. There is a plain difference in techniques and objectives of Mutual Fund and Insurance as they are two separate domains of expertise. By mixing the two, you end up not making the most out of any. A typical ULIP scheme invests a very small amount out of a premium and has a lower NAV growth rate than Mutual Fund. So if returns are what interest you, then your money is best employed in a Mutual Fund.
To know more about the MF v/s ULIP advantages, study the following:
Myth 5: Why should I put money elsewhere when equity funds give highest returns?
Resolution: Always weigh trading decisions against risk.
“Take calculated risks. This is quite different from being rash” – George S. Patton, American Army General
Equity fund NAV can drop fast in a short-term scenario, which can make it difficult for you to attain your investment goals. Through diversification, your assets will be allocated across different asset classes, viz. equity and debt. This will smooth volatility and can assist you better in achieving your goals. A balanced fund typically spreads out assets between Equity:Debt in the 60:40 ratio that brings down volatility of the NAV.
To learn more, look at the following:
Myth 6: Should I opt for Growth or Dividend option?
Resolution: Growth option could be better for the long term.
“He who gathers money little by little makes it grow.” – Bible Sacred Scriptures
Although dividends are tax-free, they may not help you meet your needs due to low returns. On the other hand, growth options don’t pay any such dividends and therefore it may go on rising in relation to the market movement. The total absolute return of dividend option will be lower than the NAV of growth option. This gap will go on widening with each dividend payment. So unless dividend receipts are your investment goal, growth option might leave you higher returns in the long run.
To better understand the growth difference look at the graph provided:
Myth: 7 : Market is so volatile; I should sell!
Reasoning: Volatility can be false alarm. Hang on!
“Patience is the best remedy for every trouble” – Titus Maccius Plautus, Roman Playwright
A volatile period tests the most experienced investors as it is hard to sustain, but patience finally pays off. India is the second fastest growing economy in the world and therefore its economic fundamentals look positive for the long term. Volatility is simply the nature of market and hence, inevitable. But in the long run, the fundamental factors will influence the markets and reward you!
Trace the volatility of the market from 2004 to 2009 in the adjoining graph:
Myth 8: Markets are falling. Should I stop my SIP purchase?
Reasoning: Falling markets are best for accumulation strategy.
“They that sow in tears shall reap joy.” –Bible Sacred Scriptures It is a trying period for investors when the markets are facing a steady downfall. But there is a certain way of turning this apparent curse into a blessing. When the NAV (Net Asset Value) falls, you can continue accumulating SIP units. When the NAV is low, it indicates a good time to go ahead with SIP.
To know more, look at the adjoining graphs:
Myth 9: IT is hot. Shall I invest my entire surplus in IT?
Reasoning: Diversify investments across sectors
There is a possibility that in a given year, a particular sector is doing extremely well. But this does not always mean that the sector will continue doing well through the next year, too. It does not make the risk attached to investing in a particular sector any less. Thus, diversification across different growth-oriented sectors is a smarter way to go about it. This will make your returns smoother and possibly more positive than to have invested in that sector alone. Owning a portfolio which has divided assets in different high-potential sectors can be very yielding.
Look at the graph below for more information:
Myth 10: Mutual Fund does not guard me against inflation.
Resolution: Equity schemes beat inflation in the long run.
“Beating inflation is like swimming against the current, if you are not fast enough you may be going backwards.”
Inflation is a variable and therefore fixed return investments may not be helpful to beat during high inflation period. The taxation factor also cuts down return. Long term equity fund investments can however maintain a higher rate than inflation. Typically, in a growing or developing country like India, rate of inflation will be on the higher side but equity fund growth rate would be stronger because of strong economic growth rate.
To support the argument, view the performance of MF during inflation: >
Myth 11: A fund with a lower NAV is better than a fund with a higher NAV.
Resolution: Focus not on the NAV but on composition of the portfolio.
“Dil ko dekho, chehraa na dekho” – From Hindi feature film, ‘Sacchaa Jhoothaa’
The difference between the NAV of two schemes could only be due to the inception date; a newer scheme is likely to have lower NAV than an older scheme. An NAV figure will only decide the number of units the investor will receive for the amount invested. In lieu, it is the portfolio composition and your financial goals that you should concentrate on. A NAV is just a figure!
Look at the given example:
Myth 12: Don’t put all your eggs in one basket.
Resolution: Mutual Funds provide choice for every risk appetite.
“In this world nothing can be said to be certain, except death and taxes.” –Benjamin Franklin, American Scientist, Diplomat
There are various options to suit an investor’s objective. When stock markets are known to be very risky and unpredictable, in the long run they seem to work out on the uncertainties. This way, they provide higher returns, in long-term. Those investments that assure return can be considered to provide safety, but one must look at several cases where equity-oriented funds outperform them. Mutual Fund investments, on the other hand, have arrived with high returns by a vast margin, in the same period. These also have several different schemes that an investor may choose from to satisfy his risk appetite
The following graph and figures will prove so:
Myth 13: What kind of returns can you guarantee me?
Reasoning: Equity funds give vastly superior returns than fixed income.
“Outside show is a poor substitute for inner worth.” –Aesop, Greek Fabulist
Many people lay off equity investments as they deem it risky and unfit as compared to debt investments. Adhering to fixed income will blind one from the other more lucrative opportunities they may receive by investing in equity funds. Ours is a growing economy; which heightens the prospect of achieving capital gains by investing across the many sectors. Returns of equity funds can be vastly higher than the debt investments. You can thus, easily build wealth by investing in long-term equity funds.
To confirm this, look at the adjoining graph: