7 Myths about Mutual Funds
Any investment requires careful assessment and proper planning. Mutual fund investment is no different, even if you have a fund manager to rely on. To benefit from your investments, you need to clear half-baked truth offered from various sources and get your facts straightened out.
Here are a few myths and facts about mutual funds to help you get a clearer picture.
1. Mutual Fund needs large investment
Unlike real estate, a person can start with smallest amount and in any possible combination. The limit set in mutual fund is meager INR 1,000. Today, if we think of buying a house in some good locality, cost would be not less than INR 2-3 crore, and if its through home loan, return potential out of that real estate should be more than rate of home loan i.e. 10%, which is unlikely as market prices have started correcting and in south bombay, it is down by 20-30%.
2. Mutual funds are equivalent to betting
It is a betting, but not on individual company, it is a betting on Country. For investing in Mutual Fund, one needs to have faith in India’s potential and growth opportunity it provides. With 120 crore population and 60% working population, India’s glorious days are ahead. Mutual funds which invests into good management run companies such as Sun Pharma, sector leaders such as HUL, day to day useable services such as HDFC or SBI Bank, are bound to make money for their investors, without an exception.
3. Not guaranteed returns
Why one needs to limit their earning potential? If you invests into Bank Fixed Deposits, maximum one can get is the coupon rate of interest – be it 7% or 8%. If India’s GDP grows at 8%, companies’ grow at 15%, should we limit our earnings?
There is certainly volatility where stock market moves wildly, your fund may be down about 10%, and it may go up by 15%, but over 10-15 years, it will not matter as Mutual Funds which are with sound investment logic can still return more than any other asset class. Fixed Deposits offers 7%, Gold offers 7%-8% and Real Estate is totally unpredictable, but looking at market scenario, may end up negative. Against this, equity MFs, depending on the theme, have given returns from 15-30% historically.
4. Mutual Funds mean Equity
Though equity offers highest returns over a period of time, it’s not the only option in Mutual Funds. With ever fast evolution of Mutual Fund industry and highly alert regulator such as SEBI, mutual fund offers investment opportunity for Gold through Gold ETF, Bonds through Debt Mutual Funds, Inter-Bank lending through Liquid Funds, Real Estate Focused Mutual Funds. So there is wide spectrum of options available for you to invest into, which your financial advisor may be in a better position to assist you.
5. Tedious Process and Documentation
Much simpler than buying a house property. All you need is a financial advisor to select the suitable investment options and assist you to execute your transaction. It can be completed with just help of your PAN Card and Bank Account. Also, with mobile phones are common than ever, one can view their portfolio online.
6. Several Mutual Funds are better for diversification
We all have heard “Too many cook spoils the soup”. Typical mutual fund invest into atleast 30-40 companies, which itself is enough diversification for risk management. Also, best performing mutual funds are few and not all. Hence, focus should be on selecting the right mutual fund scheme and periodic monitoring for its performance.
7. Money gets blocked due to lock-in period
Mutual fund is the most liquid asset class next to Cash. With debt fund offering settlement on the same day or T+1, and Equity Funds in T+3 days, one need not go anywhere and money gets right into your Bank Account. Real Estate can take anywhere between 2 weeks to years, Gold may take few days subject to realization of cheque of the Jeweller.
Only Equity Linked Saving Schemes (ELSS) and Fixed Maturity Plans (FMP) will have lock-in period such as 3 years for ELSS and 90 days to 1200 days for FMPs.
It would be wrong to say you should invest only into Equity or Equity Mutual Fund, but as a prudent investor, one needs to invest in different proportion in these assets. One should focus on liquidity, returns, risk profile, time horizon before deciding on any investments and shall consult their investment advisor for appropriate guidance. I would love to hear anything specific regarding above points such as your opinion or suggestion.