In this article, we will bust 11 popular mutual funds myths.
Are you ready?
Most people think that financial planning is a one-time exercise. And once they invest, they can reap that return forever.
Alright, you need to have a financial plan, no matter what age you are.
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 their growth.
Are you one of those people who think that only if you are rich, you can invest?
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 a SIP which is as low as Rs.500. In a 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)
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 a 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.
You do not need to be an expert to invest in mutual funds, you can be an amateur and still invest in them.
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.
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.
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.
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.
Broadly, there are three categories of funds:
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.
It’s not true that debt funds are better than equity. Both have their pros and cons.
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 fewer returns.
You must take the decision to invest in equity or debt, keeping in mind your risk appetite, financial goals and duration of the investment.
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.
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.
It is true that KYC is mandatory for investing in mutual funds. However, you do not need it multiple times.
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 the creation of long-term wealth.
It is recommended that you invest in mutual funds for the long term, but you can invest for the short term as well
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.
A Retirement and an emergency fund are both equally important as they cadre to different needs
What you must understand is 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.
Disclaimer: The views expressed in this post are that of the author and not those of Groww