Investing in mutual funds can be a smart way to grow your wealth, but there are many myths and misconceptions that can make them seem more complicated than they really are. Whether you're a seasoned investor or just starting out, it’s important to clear up these misunderstandings to make informed decisions. Let’s take a closer look at some of the most common myths surrounding mutual funds and set the record straight.
1. Mutual Funds Are Only for the Stock Market
Myth
A lot of investors believe that mutual funds are only for investing in the stock market.
Truth
Not at all. While equity funds invest in stocks, mutual fund investments can be made in various asset classes, such as equity, debt, and hybrid funds. India offers a diverse range of debt funds (fixed income), hybrid funds (mix of both), and gold funds, allowing investors to align investments with their risk tolerance and financial goals.
2. Mutual Funds are not for young Investors
Myth
A large number of people believe that mutual funds are only suitable for investors after a certain age and that young investors shouldn’t be investing in them.
Truth
This myth is misleading.. Mutual funds can cater to a variety of investors as per their age, risk appetite and goals. For instance, a young investor in their 20s or 30s might have different investment goals, such as saving for a home or starting a business. However, mutual funds can still play a valuable role in their investment portfolio by providing diversification, professional management, and the potential for growth over the long term.
3. You Need a Demat Account to Invest in Mutual Funds
Myth
People think one needs to open a Demat account if they want to opt for mutual funds.
Reality
While it's true that a Demat account is required for trading stocks and holding shares electronically, mutual funds are different. In fact, you do not need a Demat account to invest in most mutual funds. Investors can invest directly through mutual fund houses or online platforms, bypassing the need for a Demat account altogether.
Past Performance Guarantees Future Success
Myth
A common misconception is that mutual funds that have performed well in the past will continue to generate similar returns in the future.
Truth
That's not true. Just because a fund performed like a blockbuster movie in the past doesn't guarantee similar returns in the future. It's like judging a cricket match based on yesterday's score. Mutual funds are subject to market volatility, and external factors can influence their future performance. For instance, market downturns, changes in interest rates, and geopolitical events can all affect mutual fund returns. It's important to conduct research, consult experts, and invest according to your own financial goals and risk tolerance.
5. Mutual funds are Tax-Free
Myth
There is a common belief that mutual fund investments do not attract taxes, largely because of the focus on tax-saving schemes like ELSS (Equity Linked Savings Schemes).
Truth
While certain mutual funds like ELSS provide tax benefits under Section 80C of the Income Tax Act, not all mutual fund returns are tax-free. In fact, most mutual funds are subject to capital gains tax. There are two main types of capital gains tax: short-term capital gains (STCG) tax and long-term capital gains (LTCG) tax, which apply depending on the holding period of the investment.
- STCG Tax: If you sell your mutual fund units within three years for equity funds or three years for debt funds, you will be liable to pay a short-term capital gains tax.
- LTCG Tax: If you hold your units for more than three years, long-term capital gains tax applies. For equity funds, LTCG over ₹1.25 lakh is taxed at 12.5%
6. Lower NAV means higher return
Myth
Some investors believe mutual funds with a lower NAV (Net Asset Value) offer a better investment opportunity, assuming that they will yield higher returns.
Truth
The NAV of a mutual fund reflects the per-unit price of the fund and is determined by the total value of the fund's assets divided by the number of units in circulation. NAV is essentially a snapshot of the current price of a mutual fund unit and has no bearing on future performance.
A lower NAV does not necessarily translate into higher returns. When comparing funds, investors should look at other factors like the fund's historical performance, management fees (expense ratio), investment strategy, and risk levels. The key is to focus on the overall strategy and objectives of the fund rather than its NAV.
7.You need huge sum to invest in Mutual Funds
Myth
Many people believe that investing in mutual funds requires a large upfront capital, which deters them from exploring this investment option.
Truth
This is a common misconception. One of the key benefits of mutual funds is that they allow you to start with a relatively small amount of money. Thanks to SIPs (Systematic Investment Plans), you can begin investing with as little as ₹500. SIPs allow you to invest small, fixed amounts regularly, making mutual funds accessible to a wider audience, regardless of their initial capital.
8. All mutual funds have lock-in period
Myth
There is an assumption that all mutual funds have a substantial and long waiting period.
Truth
While it is true that certain mutual funds, such as ELSS (Equity Linked Savings Schemes), have a lock-in period of three years, many mutual funds, especially open-ended funds, offer complete flexibility. These funds allow you to redeem your investments at any time, without any restrictions.
9.Debt is Always Safer Than Equity Funds
Myth
Many investors believe that debt mutual funds are inherently safer than equity mutual funds and should always be the preferred choice for conservative investors.
Truth
While it is true that debt funds are generally less volatile than equity funds, they come with their own set of risks, such as interest rate risk and credit risk. Debt funds invest in fixed income instruments like bonds, which can be affected by changes in interest rates and the creditworthiness of issuers.
On the other hand, equity funds invest in stocks, which are more volatile but have the potential for higher returns over the long term. A balanced approach is best. Diversifying your portfolio with both debt and equity funds can provide stability while still allowing for growth potential.
10.Mutual funds are not for conventional investors
Myth
There's a misconception that mutual funds are only for sophisticated investors or those willing to take on high risk.
Truth
Mutual funds are suitable for all types of investors, including those who prefer a more conventional approach. The key is to choose the right type of mutual fund that aligns with your financial goals, risk tolerance, and investment horizon. Regular portfolio reviews are essential to ensure that your investment strategy remains aligned with your evolving needs and market conditions.
The Clarity
Mutual funds are a versatile and accessible investment option for people at all stages of their financial journey. By understanding the facts behind the myths, you can approach mutual fund investments with confidence, knowing you are making choices that align with your goals and risk tolerance. With the right knowledge, you can navigate the world of mutual funds and build a strong, diversified portfolio that sets you up for long-term success.
