Mutual fund investing is often misunderstood due to industry jargon and common misconceptions, especially among first-time investors in India. In the Indian context, the Association of Mutual Funds in India (AMFI) has taken steps to simplify these concepts. However, several misconceptions persist. To make informed investment decisions, it is important to clearly understand Mutual Fund Myths vs Facts and distinguish assumptions from verified realities.
- Myth 1: Mutual Funds Are Only for Experts
- Myth 2: Mutual Funds Are Only Meant for Long-term Investing
- Myth 3: Investing in Mutual Funds Is the Same as Investing Directly in Stocks
- Myth 4: Mutual Fund NAV Myths: Does a Lower NAV Mean Better Returns
- Myth 5: SIP Investment Myths: Do Mutual Funds Need Large Amounts
- Myth 6: Do Mutual Funds Need a Demat Account
- Myth 7: Is a High NAV Bad for Mutual Funds
- Myth 8: Investing in Top-Rated Mutual Funds Guarantees Better Returns
- Conclusion: Understanding Mutual Fund Myths vs Facts
- FAQs
In fact, mutual funds are designed specifically for common investors who may lack the specialised knowledge or technical skill set to navigate the securities market directly. These funds are professionally managed by expert fund managers after extensive market research for the benefit of all participants. In practice, mutual funds allow investors to hire a full-time professional to manage your money.
This article breaks down common mutual fund myths vs facts to help beginners and experienced investors better understand how mutual funds work in India.
Myth 1: Mutual Funds Are Only for Experts
Fact: Mutual funds are designed for common investors who may not have the time, knowledge or expertise to invest directly in the securities market. These funds are managed by professional fund managers who conduct in-depth market research and make investment decisions on behalf of investors. Mutual funds offer an affordable way to access full-time professional management.
(Source: AMFI)
Myth 2: Mutual Funds Are Only Meant for Long-term Investing
Fact: Mutual funds can be used for both short-term and long-term goals, depending on an investor’s time horizon and objectives.
There are multiple categories of mutual funds catering to different durations:
- Liquid Funds invest in low-risk instruments with maturities of up to 91 days
- Ultra Short-Term Bond Funds typically have maturities of less than one year
- Short-Term Bond Funds invest in securities with maturities between one and three years
- Long-Term Income Funds invest in instruments with maturities ranging from three to ten years
While equity funds are more suitable for long-term wealth creation, debt mutual funds can be appropriate for short-term investment needs of less than five years.
(Source: AMFI)
Myth 3: Investing in Mutual Funds Is the Same as Investing Directly in Stocks
Fact: Mutual funds invest across multiple asset classes, including equities, corporate bonds, government securities and money market instruments such as Treasury Bills, Commercial Papers and Certificates of Deposit. Many of these instruments are not directly accessible to retail investors due to high minimum investment requirements. Mutual funds allow investors to participate in these markets through a pooled investment structure.
(Source: AMFI)
Myth 4: Mutual Fund NAV Myths: Does a Lower NAV Mean Better Returns
Fact: A mutual fund’s NAV simply represents the market value of its underlying investments and has no impact on future returns. For example, investing ₹10,000 in a fund with an NAV of ₹20 or another fund with an NAV of ₹100 will yield the same return if both funds invest in identical securities and those securities rise by the same percentage. Returns depend on portfolio performance, not the NAV level.
(Source: AMFI)
Myth 5: SIP Investment Myths: Do Mutual Funds Need Large Amounts
Fact: Mutual fund investments can be started with relatively small amounts. Most schemes allow:
- Lump-sum investments starting from around ₹5,000
- Additional investments from as low as ₹1,000
- SIP investments starting from ₹500 per month
- For ELSS schemes, the minimum investment can be as low as ₹500.
(Source: AMFI)
Myth 6: Do Mutual Funds Need a Demat Account
Fact: Holding mutual fund units in Demat form is optional for most schemes. Investors can choose to hold units in statement form instead. A Demat account is compulsory only for Exchange Traded Funds (ETFs).
(Source: AMFI)
Myth 7: Is a High NAV Bad for Mutual Funds
Fact: A high NAV does not mean a mutual fund is expensive or has reached its peak. NAV reflects the fund’s historical performance and portfolio value. Fund managers regularly buy and sell securities based on market conditions and investment strategy. A higher NAV often indicates historical performance over time.
(Source: AMFI)
Myth 8: Investing in Top-Rated Mutual Funds Guarantees Better Returns
Fact: Mutual fund ratings change over time and are influenced by market conditions. A fund that is highly rated today may not retain the same rating in the future. Ratings can help shortlist funds, but investors should regularly review fund performance against benchmarks and not rely solely on past returns.
(Source: AMFI)
Conclusion: Understanding Mutual Fund Myths vs Facts
Mutual fund investing is often misunderstood due to common myths around risk, cost and complexity. In reality, mutual funds offer flexibility, professional management and access to diversified investments for investors across income levels and time horizons. Understanding the facts can help investors make more informed and confident investment decisions.
Disclaimer: Investments in the securities market are subject to market risks, read all the related documents carefully before investing. This content is purely for information purpose only and in no way to be considered as an advice or recommendation. The securities are quoted as an example and not as a recommendation.
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