5 Misconceptions About Mutual Funds That Every Investor Has!
Ever since demonetization in November 2016, the mutual fund industry has been growing at a considerable pace as a significant number of new retail investors have entered the bandwagon.
While the industry has been growing at a tremendous pace, it still accounts to only 10% of the overall GDP (Gross Domestic Product) of the economy.
While developed economies such as the United States have a contribute a GDP as high as 30-35%.
This indicates significant growth opportunities for the sector and we can see a sizeable increase in a number of investors.
Amidst this, we have been receiving multiple queries from investors asking queries with respect to investment in funds. In this blog, we seek to discuss the myths and truths related to investing in mutual funds.
This shall help investors overcome fears and apprehension about investing in mutual funds.
Read on!
Misconception 1 – You Have to be a Financial Pundit to Invest in Mutual Funds!
People tend to avoid investing in mutual funds fearing that they have no knowledge on how mutual funds function. Reality is that it is not true and you don’t really need to be an expert in the field of investing.
On the contrary, a mutual fund is suited for those who don’t understand investments. Professionals manage the fund, it is an ideal option for people who either have no knowledge or have no time to go through the intricacies of the functioning of a fund.
The fund manager supports you by picking the right stocks, times the buying or selling, research and analysis. The fund advisor helps you to choose a scheme that considers your risk profile, financial objective, and investment tenure.
Misconception 2 – The Investment Demands a Huge Amount
This is a misconceived notion that one should invest a large amount of money to earn substantial returns.
The investment can be started with a small amount of Rs. 500 per month through SIP. You can increase this depending on your increase in savings or income.
If your fund earns an annualized return of 12%, even a modest sum of Rs. 2,000 a month can grow to Rs. 20 lakh in 20 years. If you increase the investment by 10% every year, the corpus at the end of 20 years will be almost double at Rs. 39.5 lakh.
So, don’t avoid investing because you have a small surplus today. Regular investing and a disciplined approach can help you build a huge corpus over time.
Misconception 3 – Mutual Fund = Equity Market
This is one of the biggest myths that investors harbor.
Investors who do not know much about Mutual funds believe that fund invest only in equities. This belief, coupled with the volatility of the stock market could prevent investors from investing in mutual funds.
Remember, around two-thirds of the assets under management of mutual funds are in debt instruments as of September 2016.
And not just debt, investors can invest in hybrid funds as well, which is a culmination of debt and equity funds. Imagine the mutual fund industry to be a shopping mall, there is an ideal shop for every kind of shop!
Misconception 4 – A 5-Star Rated Fund is Absolutely Safe
it is a dynamic world and everything keeps changing, including the mutual fund industry.
Excellent past performance and track record are no a guarantee of future returns. Star rating, as shown by companies provide some idea but these ratings keep changing depending on multiple factors including performance, risk, reward, volatility and many more.
A five- star fund can become three-stars or two-stars based on its risk-adjusted performance and volatility of its returns. Relying only on rating may not help.
Ratings, performance and comprehensive analysis including analysis of management track record, experience etc. needs to be considered before finalizing on any fund.
Misconception 5 – SIP NEVER Loses Money
Yes, it is true that SIPs are very good for long-term investing.
SIPs spread out the risk potential and therefore are apt for high risk-high return funds. But NO investment can classify as 100% safe.
So, make a realistic assessment of the risk you are willing to take before putting money in equity funds—whether a lump sum or through SIP when the market falls, NAVs come down.
To conclude, we believe by now you would have gone through the reality and the benefits mutual funds offer.