11 Mutual Fund Myths Busted!

In this article, we will bust 11 popular myths surrounding mutual funds.

Are you ready?

Myth 1: Financial Planning Is a One-Time Exercise.

Most people think that financial planning is a one-time exercise. And once they invest, they can reap that return forever.

Fact

• You must have a financial plan to achieve your goal systematically.
• Your goals are bound to change as time passes by.
• Sometimes, your goals as such might not change, but there may be several factors that will affect your goals, like economic, environmental and political factors.
• It is important that you review your investments periodically

What I Think

Alright, you need to have a financial plan, no matter what age you are.

Why?

Because the process of investing becomes easier. When you have a financial plan, you must keep a few goals in mind. Now, these goals might change from time-to-time.

For example, when you are 21 years, your goal in life would be to own a car. But, when your 40, your financial goal will probably be to build a substantial fund for your children’s education.

Your goals can change due to a number of reasons like environmental and political factors as well. For example, different governments will have different financial policies according to which your goals will change

Financial Planning must be done periodically, like a health check-up. It is also important that you keep reviewing your investments and keep a measure of its growth.

Myth 2: Investing, a Rich Man’s Game?

Are you one of those people who think that only if you are rich, you can invest?

Fact

• You do not need to have a bank balance of lakhs to invest.
• Neither do you have to do a one-time investment, you can go for an SIP
• You can simply invest small proportions every month or so
• It is possible to invest periodically through mutual funds, by investing through the Systematic Investment Plan (SIP’s)
• The minimum amount of investment can be as low as Rs.500
• Through compounding, a small sum of money can convert itself into a large amount

What I Think

Let’s say you are 21 years old and your salary is Rs.20,000. You might think it is too small an amount to invest.

That is the wrong notion.

You can start an SIP which is as low as Rs.500. In an SIP, a small portion of your income/saving gets deducted every month and you may stop the scheme any time you want.

It is completely false that you must invest a lumpsum amount if you want to pursue investing regularly.

Now, when that same money is invested and re-invested, it is seen that the returns you garner are excellent if you have remained invested for a long duration (5+years)

Myth 3: Too Young to Start Investing

Fact

• The earlier you begin to invest, the more wealth you can accumulate
• You will also have time in your favor, which means that if the market suffers a downfall, you will have time to redeem your money, if you remain invested.
• You can be an amateur and become a successful investor
• In mutual funds, your money is handled by professionals, which comparatively reduces risk.

What I Think

If you are young, it is all the more reason for you to invest.

You must be wondering why.

It is because you will have time to your advantage. For example: You have invested Rs.20,000. Now, the market suffers a crisis, your investment value will decrease.

However, if you remain invested for a long period of time the market will recover and you will receive return on investment. It does not matter if you are a newbie in the world of investing.

If you invest in mutual funds, your money is handled by the AMC or asset management company and therefore, it is less risky.

Myth 4: Need to be an Expert to Invest in Mutual Funds

You do not need to be an expert to invest in mutual funds, you can be an amateur and still invest in them.

Fact

• Mutual fund companies use their experience to allocate your money in a way that maximizes your returns
• This is not the case for other investment tools, but you may invest in them, once you have gained substantial experience.

What I Think

Mutual fund companies use their expertise to allocate funds in such a way that suits the needs and interests of the investor.

You, as an investor can invest in other vehicles yourself, once you have gained substantial knowledge about the different avenues of investing.

Myth 5: I Don’t Need to Plan for my Retirement 

Well, a lot of you might think that planning for your retirement is a waste of time, as your expenses will ultimately come down, once you have retired.

Fact

• Once you retire, you may want to spend on certain luxuries like going on a vacation, or even have to spend on certain medical needs. Here’s where retirement planning kicks in.
• It is therefore paramount that you strategize your post-retirement life.

My Answer

You may want to travel to an exotic destination. Maybe you never had the time.

Now that you have retired, you’d want to pursue your dream vacation. But wait, what if you don’t have substantial money to fund that vacation? This is exactly why you need a retirement fund.

Post-retirement, there might be many needs that crop up. It is important that you start investing money well in advance to support those needs.

Myth 6: Mutual Funds Invest Only in Equities?

It is a general belief that mutual funds only invest in equity and equity related securities, which is not true. There are funds that invest exclusively in debt.

Fact

• Mutual funds are segregated into separate categories like equity, debt and other money market instruments
• There are funds like the balanced fund, that invest in equity and debt, in order to minimize risk.

What I Think

Broadly, there are three categories of funds:

1) Equity
2) Debt
3) Hybrid

These categories have varying risks.

For example: Equity funds are risky, but they provide high returns. Debt funds have low risk, but provide comparatively lower risk. Hybrid funds, on the other hand, are a mixture of both, equity and debt, which moderates the risk factor.

Myth 7: Debt Is Better Than Equity

It’s not true that debt funds are better than equity. Both have their pros and cons.

Fact

• Debt and Equity funds are equally important for your portfolio
• Debt mutual funds remain stable against market downfall
• Equity funds, on the other hand, provide much better returns and help you to grow your wealth faster
• It is important to know your financial goal and understand your risk appetite. Make sure to review your portfolio  periodically

What I Think 

Debt and equity funds are predominantly different from each other. Where equity funds are risky and provide higher returns. Debt funds are low on risk but provide less returns.

You must take the decision to invest in equity or debt, keeping in mind your risk appetite, financial goals and duration to invest.

Think of it this way, if you have a healthy risk appetite and are willing to invest for the long term, it is always advisable to invest in equity funds, because as explained earlier, if the market goes through a crisis, it will give your funds ample time to recover.

Myth 8: Professional Experts Handle My Money so I Do Not Have to Review My Mutual Fund Portfolio

Fact

• Your goals change!
• The market conditions change
• The economic scenario changes
• To ensure that you are on the right track and not making losses, you must review your portfolio at regular intervals

What I Think

Mutual Fund Professionals are not looking at your overall portfolio. So, either you hire an advisor to help you with it or keep reviewing yourself regularly. As with time, your goal changes, risk changes, salary changes. So you should periodically review your investments.

Myth 9: Know Your Customer (KYC) Is Needed Multiple Times for Mutual Fund Investments

It is true that KYC is mandatory for investing in mutual funds. However, you do not need it multiple times.

Fact

• KYC is a one time process that all investors must follow before investing in mutual funds. It is a mandatory exercise
• It can be done through a SEBI- registered intermediary, like Groww. You can seek the intermediary’s assistance by asking them about the documents required for completing the KYC
• Long-term mutual funds provide various benefits like decent returns through compounding, tax deductions, etctera.

What I Think

KYC is a one-time need that all investors have to adhere to.

It’s a verification that needs to be submitted. There are completely paperless portals that make this job easier through E-KYC.

In the long-run, it is beneficial for investors to complete this process as mutual funds have proven to give excellent returns, along with tax deductions and creation of long-term wealth.

Myth 10: Mutual Funds are for Long – Term Investments

It is recommended that you invest in mutual funds for long term, but you can invest for a short term as well

Fact

• There are different investment durations while investing in mutual funds, like long-term, short-term and medium-term.

• Categories like short-term debt funds and liquid funds are ideal for investing for a short or medium duration.

What I Think

Investing for different durations can have its own advantage.

For example, if you invest for a long duration, in let’s say, an equity fund, you will attain high returns and it will help you in your long-term goal of creating wealth.

While a debt fund is ideal for parking your funds as it gives better returns than government mechanized instruments like FD.

Myth 11: Retirement Funds are Irrelevant When You Have an Emergency Fund

A Retirement and an emergency fund are both equally important as they cadre to different needs

Fact

• No matter which profession you work in, you will retire one day. It is also certain that you will need a decent saving to cover your medical needs and emergencies.
• An emergency fund will usually have enough money to cadre for 3-6 months. Therefore, a retirement fund must be different from an emergency fund
• Mutual Funds can help you in this process, because of its diverse nature.
• Your money will be strategically invested across various securities like equity, debt and other money market instruments

What I Think

What you must understand that an emergency fund and a debt fund are two very different things.

For example, we know that you will retire at 60 and that’s when the retirement fund will kick in. Whereas, the emergency fund is for unforeseen situations like an accident.

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww