Mutual Fund Myths Busted

Dive into our comprehensive guide to debunk common mutual fund myths. Gain valuable insights to make informed investment decisions and achieve your financial goals confidently.

Myth: Mutual funds are only for those who like to invest in the stock market

Fact: Mutual Funds (MFs) are investment vehicles but not confined to the stock market alone. MFs also invest in money market & debt market instruments Treasury Bills, Govt Securities, Certificate of Deposits, Commercial Papers, and Corporate Bonds, etc. The benefits of investing through MFs are that the investments and associated risks are managed professionally by fund managers, backed by a team of analysts.

Also by investing in Mutual Funds, one is not worried about tracking the various sectors and companies and their growth prospects. The investor is not required to take the call when to buy or sell the shares. Further, the investor gets the benefit of diversification. E.g., a diversified equity fund would invest across several stocks which would not have been otherwise possible if the individual investor were to invest directly in stocks.

Myth: Redeem funds with high NaV and reinvest in schemes with low NaV

Fact: Many investors relate MFs to shares and, so, exit a scheme when the NAV rises by a certain percentage. NAV is nothing but the market value of the underlying assets of the fund divided by the number of units. So it is not the NAV value that should be the deciding factor for investment or redemption but the performance of the fund in terms of percentage returns, performance in comparison to benchmark, volatility, risk-reward return of the fund, etc. The NAV is a reflection of the market value of the shares held by the fund on a particular day. So it is advisable to remain invested in Mutual Funds for the long term to gain benefits.

Myth: You need to time MF investments

Fact: Investors are advised not to time the market. The most important aspect of equity investment is to stay invested for a long time. Instead of timing the market, investors are advised to invest through Systematic Investment Plans (SIPs) and Systematic Transfer Plans (STPs). In a SIP, you can invest a certain amount at regular intervals—daily, monthly, or quarterly.

A SIP ensures disciplined investment irrespective of the market movement and helps in averaging the cost through market cycles. In case you have a large sum and wish to invest in an equity fund, it may be prudent to invest over a period. To do this, you should park the sum initially in a debt fund, a liquid or ultra-short-term fund, and then transfer regularly a small, fixed amount into the equity fund.

Besides, the timing becomes less important for a long-term investment horizon. Also, consult your financial advisor who can help you allocate your funds per your risk profile.

Myth: Debt funds are also impacted by equity market movement

Fact: Debt funds, or income schemes, do not invest in equity and as such are generally not impacted by stock market movements. These funds invest in money market and debt instruments such as Treasury Bills, Government securities, fixed-income securities such as Corporate Bonds, Debentures, CDs & CPs. These instruments have relatively low risk and a stable income.

Myth: Buy MF schemes only when the markets are good and high

Fact: As discussed earlier, it isn’t easy to time the market. Rather than timing the stock market, one should invest regularly and reap the benefits from rupee cost averaging through strategies such as SIP & SWP.

Myth: Sell mutual fund investments when markets are at a high

Fact: Do not worry about market fluctuations if you are a long-term investor. But, if your portfolio has gone significantly high, you may sell portions of it to realign it to your investment objectives. This will ensure that your investments remain aligned with your risk profile. But if you have goals, say, 2-3 years away, and feel that the market is at a high, you can consider switching to debt funds.

Myth: All mutual funds have a lock-in period

Fact: You can buy and sell open-ended MFs on any business day. Only in closed-end schemes or fixed maturity plans (FMPs) can you typically invest at the time of the NFO and exit on maturity. However, close-ended schemes/FMPs are co-listed on the stock exchange where the investors can buy/sell the units. An equity-linked savings scheme (ELSS), which qualifies for tax deduction under Section 80C of the Income Tax Act, 1961, has a lock-in period of three years.

The RGESS investment has a lock-in period of three years. However, there is flexibility after the first year of investment. This means that during the first year of the lock-in period, the investor cannot sell the holdings for which he claims tax benefit. From the second year onwards, he can sell a portion of his holdings, provided he maintains the aggregate value in his account for which benefit is claimed for the next two years.

Myth: It’s difficult to track your investments

Fact: The fund house has to send an allotment confirmation to the unit holder specifying the units allotted, by email and SMS, within five business days of the investment. If one has invested in various fund houses, the solution lies in getting the consolidated account statement (CAS), which is a single account statement that reflects all transactions of a unit holder in all folios across all schemes of all MFs.

CAS has to be sent each month for folios, wherever there is a transaction, or else, half-yearly if there is no transaction. It contains the details of all the transactions (purchase, redemption, switch, dividend payout, dividend reinvestment, SIP, systematic withdrawal plan, STP, and even the bonus transactions) across all schemes of all MFs during the month and, the holding at the end of the month. Please ensure that the email address is updated with each fund house and under each folio.

Myth: Performance of funds is directly related to the stock market

Fact: An Equity MF scheme typically invests in 30-40 stocks, and it is not necessary that the stocks will replicate the stock market movement. Even in a bearish market, there would be some scrips that give very good returns. Further, a Fund Manager reviews the portfolio periodically to generate a good return. Also, fund managers have the flexibility to move a portion of the portfolio into either debt or cash which will stave off erosion to a large extent if the market were to fall.

Myth: NFOs (new fund offers) are better than existing schemes

Fact: It is not necessary that NFOs are better than existing schemes. In fact, you can choose an existing scheme with a long-term track record in place of a New Fund Offer.

Myth: One gains by buying into a lower Net asset Value (NaV) scheme

Fact: The performance of a particular scheme of a Mutual Fund is denoted by Net Asset Value (NAV). Therefore, it is immaterial if you invest either in a lower NAV or a higher NAV. What matters is the percentage return on invested funds. So, instead of looking at “low” NAV funds for investments, it is worthwhile to consider other factors, such as the performance track record, fund management, and the volatility of the fund that determine the portfolio return.

Myth: Mutual fund investments are only for youngsters

Fact: Normally a person’s age would indicate his/her risk-taking ability – the younger the age, the greater would be this ability as they have a longer time horizon to earn and stay invested. A fund caters to a certain type of risk appetite. So the selection of a fund for investment should be based on the risk appetite of the investor and the time horizon. As a thumb rule, a retiree should go for low-risk investments such as balanced funds whereas a youngster who is at the beginning of a career has the propensity and resilience to take a higher risk exposure.

Myth: Buy a fund once it announces dividends

Fact: A fund’s performance is evaluated by how much its NAV moves up or down and not on the dividend payouts. Typically, dividends are paid out of accumulated profit. When a dividend is not declared it is reflected in the NAV by way of appreciation of the NAV.

Myth: Mutual fund investments cannot be pledged as a security

Fact: Investors can pledge their units as security to financiers, such as banks, and financial institutions and, thus borrow against their MFs units. To do so, a lien has to be marked against the units. Lien refers to the right of the financier to take and hold or sell the property of a debtor as payment for a debt.

Myth: All NAV-linked products are highly volatile

Fact: NAV is nothing but the net value of the underlying securities of a fund after deducting all expenses such as management fees. NAV indicates the unit value of the fund. The concept of NAV makes MF investments very transparent. Comparison of NAV of a particular fund will indicate the performance of the fund. The volatility or risk of a fund is dependent on the underlying investments such as equity, debt, gold, etc.

Myth: Mutual fund investments are riskier than stock investments

Fact: Typically, mutual funds invest in a number of stocks and debt securities as per the fund’s investment objective. To spread the risk of investment and diversify the Fund Manager buys a variety of stocks. Further, the expertise of the fund manager in the selection of stocks, backed by research and a team of analysts, makes MF investment less risky.

Myth: Buying physical gold is safer than investing in gold funds

Fact: The security of physical gold lies on the investors, whereas if you invest in gold through gold funds or gold ETFs, you need not worry about spending on the security of your assets. That aside, investments in gold funds require very low transaction costs. Typically, the transaction cost in physical gold ranges from 10-15%, even more, if you invest in jewellery.

Myth: You need to have a lot of surplus money to invest in Mutual Funds

Fact: False! Many investors feel that to be able to grow their wealth, they need to which often leads investors to chicken out. Mutual Funds help investors to invest even smaller savings towards wealth creation. The fact is that one can begin their Systematic Investment Plan (SIP) investments with an amount as low as Rs. 500. Investors can choose to increase their SIP amount as time goes by. *For example, if your investment earns annualized returns of 12%, even an SIP of Rs. 1,000 a month can grow to Rs. 10 lakh in 20 years. Hence, one should not avoid investing even if they are left with very little surplus for SIP.

Myth: Investing in high-performance funds is a guarantee for success

Fact: Most MF schemes have different objectives and investment styles and, depending on those parameters, a fund manager will buy, sell, or hold a particular stock. Therefore it is advisable to choose a fund based on your objective and risk appetite and also consult your financial advisor.

Myth: Choosing dividend pay-out or growth option is the same in all funds

Fact: When you choose the dividend option you get to partially cash in on the returns earned by the fund from time to time, through the dividends it declares. When you choose the growth option the returns earned by the fund are retained and reflected as an appreciation in the fund’s Net Asset Value (NAV). It is advisable to go in for the Dividend Payout option if the investor needs money from time to time. However, in the short term, tax treatment for dividend payout and short-term gain is different. Dividends paid are fully tax-free and on short-term capital gain, one has to pay as per the law prevalent on date.

Myth: Tax on MF is the same as on other instruments

Fact: Profit made from the sale of mutual fund investments is termed as capital gain. For equity-oriented funds, if the investment is held for 12 months or less, it is termed a short-term capital gain and taxed at 15%. If the investment is held for more than 12 months, it is termed as long-term capital gain (LTCG) and taxed at 20%, in case the total LTCG for the year is above Rs 1 lakh.

For non-equity schemes, if the investment is held for 36 months or less, it is termed short-term capital gain and taxed at 20%. If the investment is held for more than 36 months, it is termed as LTCG and taxed at the highest tax slab applicable to the investor.

In the case of LTCG for non-equity funds, investors can avail of the indexation benefit.