Mutual Funds Common Myths Revealed

Mutual Funds: Common Myths Revealed

Mutual Funds in India are now become a routine investment product. In fact, it is the most widely used investment product right now in India. But well, There are several Myths about the Mutual Funds. And in this article, I will reveal few of the commonest mutual fund Myths which are prevalent among the investors.

Myth: 1 NFOs are Cheap

This is one of the commonest myth among the investors. They think that NFOs (New Fund Offers) are cheap because they are selling at just Rs.10 per unit. But well, this is not the truth. The truth is that, the underlying market is same stretched. Mutual Funds generate returns according to its portfolio. So if one fund has NAV of Rs.10 and the other has the NAV of Rs.1000 and both have same portfolio and at the end of a year if both the funds will generate 50% return than the NAV of the fund one will become Rs.15 and NAV of Fund two will become Rs.1500. So your Rs.10,000 invested in both the funds will become same Rs.15,000. Not more…Not less.

Myth: 2 I will Add several Funds in my Portfolio for Diversification

This is another common myth among the mutual fund investors. I have seen several MF investors who are collecting more and more funds in their portfolios at the name of diversification. In fact, there are many people whose portfolios contain as much as 100 mutual funds.

Well, Don’t be Collector but be the Investor. Only 3 or Maximum 4 equity diversified mutual funds are enough to achieve the optimal diversification of your money. This is because one mutual fund contains anywhere between 30-150 stocks portfolio.

If you will collect dozens of funds in your portfolio than it will cause over diversification and every stock in the stock market will be in your portfolio. Thus, your over all returns will be average. So Don’t be average when it comes to investing.

Myth: 3 Mutual Funds are Costly

Many people give excuses that why don’t one should invest in the stock market directly? This is because the mutual funds are costly and they charge up to 1.5% fund management charge every year. Well, We invest in mutual funds for the professional management of our money. And the professional fund management service that the mutual funds provide us generate excellent returns from our wealth and for this much professional management of our money 1.5% annual fee is minimal.

Myth: 4 I will Manage my money by myself

Yes, You can. But only do it if you are expert in doing so. But if you are speaking the above sentence because of your ego than please go for mutual funds only. If you don’t know that which stock to buy or if you don’t know that what is the meaning and importance of PE (Price to Equity Ratio) than direct stock investing is not for you. You will someday lose big amount of your money by believing someone else’s advise.

Myth: 5 Sector/Thematic Funds will give me Better Returns

Sector/Thematic funds are on two extremes. Means they are either on the top performing funds of the year or they are at the bottom. The main problem with sector funds is that they are bound by their own definitions. The fund manager of the sector fund can’t move your money from one economy sector to another but the fund manager of the equity diversified mutual fund can anytime shift your money between the two sectors if he finds something wrong in that sector. And in the long run, Diversified mutual funds have outperformed the sectoral mutual funds. So stay away from it. Your Core funds should be Equity Diversified only.

Myth: 6 I will invest in this fund because it has given excellent returns since past 3 years

We don’t invest in mutual funds only because of its past returns. But there are several things that we should analyze before investing in the mutual funds. And the best thing is to see the star rating of the mutual fund from independent fund rating agencies like Valueresearchonline.com. The Valueresearchonline will do all the hard work for you and give 1 to 5 star rating to any mutual funds. Always invest in 4 or 5 star rated mutual funds.

Myth: 7 The Stock market is down. So I am Planning to Exit from my Mutual Fund

Well, We are investing in the mutual funds for long term. So don’t see short term returns from your mutual funds. Always see the long term returns of your mutual funds say for example – 5 years, 10 years or even more. The longer you will stay invested in the mutual funds, the more money you will make. And if you are not going to invest your money in the mutual funds for the long time horizon than simply don’t invest in it. Mutual funds are not for you in that scenario.