Many common myths about mutual funds stem from a lack of understanding of how they work, such as the beliefs that they are risk-free, only for experts, or require large sums of money.
Here are some of the most prevalent myths and the corresponding facts:
- Myth: Mutual funds are risk-free and guarantee high returns.
- Fact: All mutual funds carry some level of risk because they invest in market-linked securities like stocks or bonds. There is no guarantee of profit, and you could lose money. The level of risk depends on the fund’s investment strategy and underlying assets.
- Myth: You need a large amount of money or high expertise to invest.
- Fact: Mutual funds are designed for common investors and are professionally managed by experts. You can start investing with as little as a few hundred rupees/dollars through a Systematic Investment Plan (SIP).
- Myth: Mutual funds are only for the long term.
- Fact: Mutual funds cater to various investment horizons. There are different types of funds, such as liquid funds and ultra-short-term debt funds, suitable for short-term goals (weeks to a few years), while equity funds are generally better for long-term wealth creation.
- Myth: A lower Net Asset Value (NAV) fund is better or cheaper.
- Fact: NAV is simply the price per unit of the fund. It reflects the total market value of the fund’s investments at that moment, not a measure of value or potential for growth. A higher NAV might indicate a strong track record over the years.
- Myth: Past performance guarantees future results.
- Fact: Past performance is only one factor to consider and is not a reliable indicator of future returns. Market conditions change, so it is crucial to look at the fund’s investment strategy, risk profile, and consistency across different market cycles.
- Myth: All mutual funds have a lock-in period.
- Fact: Only specific tax-saving funds, such as Equity-Linked Saving Schemes (ELSS), have a mandatory lock-in period (typically three years). Most other open-ended mutual fund schemes allow you to redeem your investments at any time, though some may have exit loads if you withdraw within a short time frame.
- Myth: Investing in mutual funds is the same as investing in stocks.
- Fact: While equity funds invest in stocks, mutual funds also invest in a wide range of other instruments like bonds, government securities, and money market instruments. They offer diversification across various asset classes, which helps manage risk compared to picking individual stocks.