Busting some myths about mutual funds to help you get started with investments
Arun, a recent MBA graduate, was talking to his brother about investing in mutual funds. His brother has been earning for some years now but has never considered investing. Upon enquiring why, Arun was shocked to hear the reason why his brother steered clear of mutual funds. He was of the belief that mutual funds require investors to pay 10% of their profits to the fund house. Arun cleared his brother’s misconception but realised that this is not the only mutual fund myth that is circulating, even among millennials. Arun, with his brother, decided to create an educational video busting some mutual fund myths. Let’s join Arun and his brother’s journey and bust some misconceptions about mutual funds along with them.
Myths about mutual funds busted
Myth 1 – Mutual funds come with a huge charge –
Let's bust this myth about mutual fund that made Arun’s brother misunderstand the investment avenue. There is a common misconception that fund houses charge a huge fee for the management of money and you will be left with a minuscule earning. But this is never the truth. In fact, the average expense ratio is about 1% to 1.5% of the value of your investment. That means, what fund houses charge is just Re. 1 to Rs. 1.5 per Rs. 100, on an average.
Myth 2 – Mutual funds guarantee returns -
Responsible for making people invest in mutual funds with false hopes, this mutual fund myth is prevalent among many novice investors even today. Your money in a mutual fund is invested in a number of securities according to the portfolio of that fund. This means that these funds are market-linked and a dip in the market will affect the fund’s performance as well. The plus point here is that since your money is invested in several securities, a dip in the price of one or two securities will only have a small and diluted effect on your investment. But that doesn’t mean it is risk-free and it guarantees a return.
Myth 3 – Mutual funds only invest in stocks –
This is a common myth about mutual funds among novice investors and people who are just getting started. Mutual funds invest your money according to their portfolio. Even when there will be a ratio of securities that is maintained as per the theme of the fund, most of them invest in a mix of securities. Even in that, if you want a mutual fund that invests mostly in stocks of companies, you can subscribe to an equity mutual fund and if you want to stay away from stocks, you can choose a debt-based fund that will have more debt instruments in its portfolio.
Myth 4 - Fund selection is not important –
This mutual fund myth is not correct as well. The performance of your mutual fund is dependent on how the securities in that fund perform. Hence, analysing a fund’s portfolio and selecting something that works for you is extremely important.
Not only that, but risk appetite is also different for different people. You might be alright with some amount of risk but someone else could be a totally risk-averse person. So, your fund’s risk should match your risk appetite as well.
Myth 5 – Mutual funds are only for long term –
When it comes to busting this myth about mutual funds, it is true that most mutual funds work better in long term. However, there are short term options too that could be beneficial for you. For example, mutual funds with fixed maturity dates that invest in debt instruments are meant for short term. Similarly, money market funds, which invest in cash and cash equivalents, are said to work best in a short tenure.
Like Arun, understanding such myths about mutual funds and busting them is important. These mutual funds misconceptions could be one reason why some people are still staying away from such investment vehicles. If you are doubtful about any mutual fund-related information, always refer to official sources such as the Association of Mutual Funds of India (AMFI) and confirm whether it’s true before acting on it.
To bust more myths about mutual funds, you could also reach out to a financial expert who can help you with your investments.
Interested in investing in mutual funds? Click here or log on to the Cherry app.