Mutual Fund: Know the Truth

Dive into our comprehensive guide to debunk popular mutual fund myths.
Investing in a mutual fund is one of the simplest and most effective ways to grow your wealth. However, many potential investors hesitate due to widespread myths and misconceptions. By uncovering the truth behind these mutual fund myths, you can make informed financial decisions and begin your investment journey with clarity and confidence.

Myth 1: Collective finances Are Only for Stock Market Experts

 Fact: You don’t need to be a stock request expert to invest in a collective fund. Fund directors and exploration brigades handle the buying, selling, and shadowing of investments. This makes collective finances ideal for newcomers and educated investors likewise.

Myth 2: You Need a Large Quantum to Start

 Fact: Collective finances are accessible to everyone. Through a draft (Methodical Investment Plan), you can start investing with as little as ₹ 500 per month. This makes wealth-structure possible indeed with a small yearly saving.

Myth 3: You need to time Mutual Fund 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 4: 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 5: Buy Mutual Fund 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 6: 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 7: 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 8: 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.

Mutual fund companies send a Consolidated Account Statement (CAS) every month if there’s any transaction in your folios. If no transaction occurs, they send it every six months. The CAS includes all your transactions purchases, redemptions, switches, dividend payouts, reinvestments, SIPs, SWPs, STPs, and even bonus units across all mutual fund schemes. It also shows your holdings at the end of the month. Ensure that you update your email address with each fund house and under each folio to receive these statements.

Myth 9: Performance of Mutual 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 10: 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 11: Tax on Mutual Funds is the same as on other instruments

Fact: When investors sell mutual fund units for a profit, they earn a capital gain. If they hold equity-oriented funds for 12 months or less, they incur a short-term capital gain and pay a 15% tax. If they hold the investment for more than 12 months, the gain becomes a long-term capital gain (LTCG). They pay a 20% tax on LTCG if the total gain for the year exceeds Rs 1 lakh.

For non-equity schemes, the investor pays a 20% tax on short-term capital gains if they hold the investment for 36 months or less. If they hold it for more than 36 months, the gains qualify as long-term and are taxed according to the investor’s highest applicable tax slab.

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