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Busting Myths about Mutual Funds

Mutual fund investments are very easy and cost-effective even for a novice but the associated myths make it a challenge for first-time and prospective investors.

A widely held but obscure or ambiguous belief is called a myth. Myths usually create hype about a particular subject or event which somehow forces the people to have the same perspective. In our everyday lives, we deal with a lot of myths in almost all types of situations. Similar patterns can be identified when investing in mutual funds as well. Mutual fund investments are very easy and cost-effective even for a novice but the associated myths make it a challenge for first-time and prospective investors.

In this article, we attempt to bust the different myths related to mutual funds.

You need a lot of money to invest.

A very common misnomer, which is totally false. A lot is heard about how investors must have a lot of capital to invest but the fact is that to invest in a mutual fund scheme, one can begin with a systematic investment plan (SIP) , which is an investment strategy where one can start with an amount as low as INR 500. Investors can subsequently choose to increase the amount of their investment over time. Hence, one can start investing even with a very small corpus.  Even a modest sum of INR 2000 a month can grow to INR 20 lakhs in 20 years with annualized returns of 12%. SIP also cultivates the practice of regular and disciplined investing, while equity-linked saving schemes lock the investment for the long term ensuring that the money grows without being affected by the market volatility or personal biases.

You need to be an expert to invest.

To have knowledge about mutual funds can always be an added advantage, but having little or no knowledge is no deterrent. On the contrary, mutual funds offer a platform for people who want to create wealth or achieve their financial goals while their investments are managed by an experienced and proficient fund manager in return for a small fee. More so, one can take the help of a financial advisor to know more about the mutual fund schemes and top performers over time.

Equity fund vs. Debt fund – a dilemma.

An investor invests in mutual funds in an attempt to achieve defined life goals. These goals can be long-term or short-term goals. How one wishes to achieve the goals determines the selection of a mutual fund scheme. Therefore, the selection of a fund depends on a number of factors like the requirements of an investor, investment horizon, investor’s risk appetite, etc. Both equity as well as debt funds, have their own unique characteristics. Mutual funds offer the opportunity to take exposure of both debt and equity in varying proportions as per investor preferences thereby offering a lot of flexibility.

Investment in best-performing schemes gives better returns.

The statement ‘Past performance may or may not be sustained in future’ is no less than a statutory disclaimer which implies that regardless of a fund’s consistent performance, it may not be the same always. To gauge the performance of a scheme, one must study and research what has driven the performance in the past and the outlook about the future. A financial advisor’s view in this regard must be sought.

Mutual funds are a shortcut to becoming rich.

Mutual funds facilitate investors into realizing their financial dreams or creating wealth. Investors invest a generous sum of their income or savings into a particular mutual fund scheme, which in the long term generate positive returns. However, mutual funds are subject to market risks. While they offer the potential of creating wealth but at times, wealth creation can take time. It is through the virtue of patience and discipline that one can have a satisfactory experience when investing in mutual funds.

Financial planning is a one time exercise.

One must have a financial plan to achieve their goal systematically. However, goals may change with time and thus periodic revision of financial plans is warranted. As several factors may affect our goals, our investments must also be reviewed periodically.

Too young to start investing.

The reverse of this statement is true i.e. if you start investing at an early age, the process of wealth accumulation fastens. In mutual funds, your funds are handled by professionals, which comparatively reduces risk. Thus, one may be an amateur but at the same time can become a successful investor at a very early age under the expert guidance and advisory of finance professionals.

I don’t need to plan for my retirement.

Most people don’t realize the importance of financial planning and especially when time is in their favor. However, to continue to maintain the current lifestyle post-retirement, one can plan while they are young and start investing systematically through mutual funds.

Mutual funds are for long-term investments.

It’s a myth that investment in mutual funds is only for the long term. Categories like short-term debt funds and liquid funds are ideal for investing for the short or medium term.

We have outlined the common myths associated with mutual funds due to which investors initially might hesitate to invest. If one is present to these myths, they can overcome resistance to investing and secure a bright financial future for themselves. We hope this article helps you in taking fruitful investment decisions.

Myths and facts – two parallel ways reflecting each other’s interpretation and living.

Dr Swati Dhawan
Dr Swati Dhawan

A SRCC & FMS alumni, Dr. Swati Dhawan has a rich teaching & training experience of more than 17 years in the area of Accounting and Finance with institutes of repute like IIM Rohtak, IIM Raipur, IIM Sirmaur, Faculty of Management Studies, Shri Ram College of Commerce, IMT Ghaziabad, TERI University, etc. Also, she has been an academic consultant & corporate trainer in management development programmes at GAIL and Alchemist. Her book on Merchant Banking & Financial Services has been published by McGraw Hill.

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