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Are you still not investing in mutual funds due to misconceptions

Nov 14, 2016 by Priyanka Chakrabarty | 58 Downloaded
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The total number of Mutual Fund accounts (Also known as Folios in the mutual fund industry) as on October 31, 2016 stood at 51 million. Out of these 41 million is from retail investors. Also, Mutual Fund industry’s average AUM (AAUM) for the month of October 2016 has crossed 16.80 Lakh Crore which is the highest ever AUM for the industry.

The above figures clearly show that Mutual Fund as an investing tool is gaining huge popularity among mass investors. But, if you really analyse the above numbers with the population of our country or with the number of savers in bank FD or traditional investments, the Mutual Fund AUM and the number of total folios look small.

While there are many benefits of investing in Mutual Funds, including tax saving and other tax concessions, there also exist certain myths and misconceptions which often becomes an obstacle for potential investors to take a decision whether or not to invest in mutual funds.

Let us check some common misconceptions or myths about mutual funds and try explaining these for the benefit of our readers.

Mutual Funds are for Expert investors only

It is meant for both - investors who do not understand much about equity investing and want to have equity like returns by investing in mutual funds and also for those who may be expert investors but do not have time and want their money to be managed by expert and professional fund managers.

To be able to invest in Mutual Funds you need to have a basic understanding of the scheme that you are investing in. These details are available in the Asset Management Company’s (AMC) website or on the application forms known as SID (Scheme Information Document) and KIM (Key Information Memorandum). Alternatively, you can also consult a mutual fund advisor to know more about mutual funds and investing in them.

Mutual Funds are managed by qualified professionals who are called Fund Managers. AMCs hire Fund Managers who are professionally qualified and have the knowledge and experience of equity and bond markets. The fund manager endeavours that the investments are done in such a manner so that the scheme investing objectives are met.

Mutual Funds are risky as they invest only in Equities

There are various types of mutual funds. As an investor, you should select a scheme based on your investment objectives and risk profile. There are various kind of mutual fund schemes to fulfil your entire investing needs.

For example – there are liquid funds which can be used as an alternative to your savings bank account. There are debt funds which are alternative to bank fixed deposits. You have Equity linked Savings Schemes (known as ELSS Funds) for tax savings and you also have retirement and pension funds for your long term retirement investing purpose.

There are various kinds of equity mutual funds for investors with different risk profile which helps one with medium to long term wealth creation objectives. Equity Funds are also popular investing options if you want to save for meeting your various long term financial goals.

If you are an investor who does not want to take much risk then balanced funds can be a good choice as these invest in both – debt as well equities.

To know the risk parameter of each mutual fund, you can also refer to the ‘Risk-o-meter’ of the fund. ‘Risk-o-meter’ defines the mutual fund schemes broadly in 5 categories – Low risk, Moderately low, Moderate, Moderately high and High. These indicators help investor upto a great extent in selecting the funds according to their risk appetite

Please read – Are you risk averse: Understand your risk capacity

A big amount is required to start investing in Mutual Funds

It is completely wrong. In fact, mutual funds are such instruments wherein you can start investing with a sum as small as 500. Moreover, there are two ways of investing in mutual funds – either lump sum or / and through systematic investing route (popularly known as SIPs). If you want to build a big corpus in future but do not have adequate funds to invest now, then do not worry. You can start investing small amounts every month through SIP route and create a big corpus in future.

Mutual Fund SIPs are for small savers

SIP is a convenient mode of investing in mutual funds. Minimum investment through SIP in a scheme is generally 500 and there is no maximum limit. The idea of SIP is not for big or small investors. SIP is a way of investing through which Investors can be benefited by rupee cost averaging and power of compounding in the long term. SIPs also bring in the discipline in an investor as it encourages saving small or big amount through a fixed interval for a fixed period.

Therefore while a small investor can take advantage of investing small amounts through SIP every month for building a corpus for his future, the big investors take advantage of equity returns by investing his large investing surplus systematically and ride the benefit of market volatility.

Therefore, it is ideal for both the purposes – build savings as well as enhance returns on already accumulated amount.

SIP Mutual Fund and lump sum Mutual Fund schemes are different

This is again a very common misconception. You can invest in mutual fund through systematic Investment Plan and / or through lump sum mode. The amount collected by a mutual fund towards a scheme through both these modes is invested in the same portfolio. Thus, irrespective of how you are investing in the scheme the fund manager is investing the entire money in the same portfolio of stocks and bonds etc.

SIP is just a way of investing and it has become immensely popular for ease of investing a small amount every month into an asset giving better returns than conventional deposits. Therefore, the returns generated by the portfolio are irrespective of the method of investing chosen by the investors.

Please also read – Lump sum versus systematic investing: which one is better

Lower NAV of a scheme is good

This is again one of the most common and talked about myths that investors hold. A mutual fund scheme with a NAV of 20 rose to 26 while another scheme with a NAV of 200 rose to 260. As an investor you might be inclined to invest in the first scheme as for a lower NAV you will be able to buy more units with the same amount of investment. However, both the schemes had a 30% rise so buying the first scheme over the other does not give you any particular advantage.

The same principle applies to NFOs (new fund offers) as investors feel they are getting units at par value. To decide on a particular scheme one should look at the performance track record of the scheme, fund managers experience, past returns, current returns on various parameters, expense ratio and volatility of the fund etc.

To know more about mutual fund returns, you should go through Mutual Fund performance consistency: Myth or reality

Mutual Funds levy penalties on missed instalments on SIP dates

As discussed earlier, investments can be done through SIP route by investing a fixed sum (normally through ECS route) on a particular date/s in a month. Investors normally choose a date based on their salary or other credits in the month. But sometime investors forget to keep the balance amount for the SIP on the ECS date or withdraw money due to some emergency need of funds etc.

You need not worry for this as on any of the month/s if you are unable to make the monthly SIP investment irrespective of any reason, no fines are levied by the AMCs and you do not lose on returns. However, one of the traits of a good SIP investor is always to ensure that all the instalments are continuing and payments are done at the right time.

However, please note that some banks do debit bank charges in case of bounced SIP ECS payments which must be checked with your banker.

Mutual Funds Invest only in equities

There are various types of mutual funds. As stated earlier, there are mutual funds for various risk profile of investors. Based on the fund mandate and type of the funds, mutual fund schemes invest in different asset classes. For example – equity mutual funds invest in equities only while debt mutual funds do not invest in equities at all and invest only in Government securities, money market instruments and corporate bonds etc. Also, there are Gold funds which neither invest in debt nor in equities but invest only in Gold.

Equity Mutual Funds are that popular category of funds that invest in equities of various companies or sectors or has equity linked components allowing investors exposure to equities. However, investors who are not comfortable with high degree of equity exposure can always opt for schemes which have debt or fixed money market instruments or exposure in Gold or real estate etc.

In fact, to summarise, mutual funds are the only investment option which provides you with the ability to invest across different asset classes with minimum to moderate to high risk depending upon your risk taking ability.

Suggested reading: Equity is the best performing asset class in the long term: Myth or truth

Conclusion

As you have read, investing in mutual funds seems simple but stops people to invest in the same due to myths and misconceptions about it. We have deliberated upon some popular myths about mutual fund investing in this 1st part. In the 2nd part we will cover some more myths and answer them. While concluding the next part we will also discover how mutual funds can be the best investing option for all type of investors.

Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.

Locate ICICI Prudential Mutual Fund Advisors in your city

Priyanka Chakrabarty

A literature enthusiast who loves to write. An ardent social worker who dreams of bringing about change and hopes to do so through her writing. A firm believer of the saying pen is mightier than the sword, Priyanka is an English Honours graduate. She also pursed Diploma in Wealth Management Practice from IIFP and is a certified social media expert.

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