Continuous decline in returns from fixed income products and other asset classes led to an increased participation of retail investors in mutual funds. However, limited knowledge about mutual funds and capital markets often lead many investors to fall prey to various myths surrounding mutual funds.
Sahil Arora – Senior Director, Paisabazaar, tries to bust 5 common mutual fund myths that can adversely impact your wealth creation objective:-
“Mutual funds MYTH #1
Mutual funds with lower NAV offer higher returns
One of the most common myths prevalent among retail investors is that funds with lower NAVs are cheaper. However, the NAV of a mutual fund can be high or low owing to various reasons. For instance, as the NAV of a mutual fund depends on the market price of their underlying assets, the NAVs of well-managed funds would grow faster than other funds. Likewise, relatively newer funds have lower NAV than older funds as the former get shorter time to grow. Thus, investors must not factor in the NAVs while comparing mutual fund schemes. Instead, they should compare the funds’ past performance and future prospects of outperforming their peer funds and benchmark indices during the fund selection process.
Mutual funds MYTH #2
Dividends are a kind of windfall income
Many investors wrongly perceive dividends from mutual funds as a windfall income. This lead them to opt for the dividend option. However, what investors often misunderstand is that declared dividends are paid out from the fund’s own AUM. As a result, the NAV of a dividend declaring fund is deducted by the amount of dividend paid on the dividend record date. Moreover, the dividend amount is calculated on the funds’ face value and not on the basis of their NAVs. For instance, suppose a fund with an NAV of Rs 80 declares a dividend of 20%. The dividend received by the fund’s investors would be Rs 2 i.e. 20% of fund’s face value, which is Rs 10. The NAV of the fund too will fall to Rs 78 after the dividend record date.
Mutual funds MYTH #3
Mutual funds only invest in equities
There are different kinds of mutual funds based on the asset class they invest in. These include debt funds, hybrid funds, equity funds, gold funds, etc. Equity funds primarily invest in equities while debt funds invest in fixed income products like commercial papers, bonds, government securities and certificates of deposit issued by banks. In the case of hybrid funds, they invest in both debt and equity.
Mutual funds MYTH #4
Huge sum of investible surplus is required to begin investing in mutual fund
The minimum initial investment amount for mutual funds usually start from Rs 5,000, with minimum additional investment amount being Rs 1000.
In case of ELSS funds, the minimum amount for both initial investment and additional investment is Rs 500. For those opting for SIPs, the minimum investment amount for ELSS and other mutual funds are usually Rs 500 and Rs 1,000 respectively. Thus, those with small investible surplus can benefit from mutual fund investments without waiting for accumulating large investible surpluses.
Mutual funds MYTH #5
Investments in mutual funds should be stopped during market correction/bearish market
Steep market corrections or bearish market conditions lead many investors to stop fresh investments in equity fund investments or redeem the existing ones fearing further losses from the market downturn. However, doing so can be detrimental for the investors as steep corrections provide a good opportunity for buying a higher number of units at lower NAVs and thus, average the investment cost and generate higher returns over the long run. Thus, investors should continue with existing equity fund investments during bearish market phase and try to top up their investments with lump sum investments in a staggered manner as per their asset allocation strategy. Doing so would enable them to restore original asset mix and reach crucial financial goals sooner, as and when the market rebounds.”