Mutual Fund Myths & Facts
There are many myths or misconceptions related to mutual fund investment, which may result in a wrong investment decision. We have listed some common mutual fund myths and facts.
Myth 1: Mutual funds only invest in equity markets.
Fact: Mutual funds invest in equity shares, gold, govt treasury bills, company deposits, commercial papers etc depending on type of mutual fund.
Myth 2: Lower NAV is better than higher NAV.
Fact: NAV of fund only represents net asset value of each unit of mutual fund. In growth option the NAV increases and decreases based on performance of funds investments, while in dividend option the NAV falls on declaring dividend or based on fund performance.
Mutual fund with Rs 10 NAV will not give better than one with Rs 100 NAV. Performance of fund will depend on performance of mutal investment not on NAV of fund. One should invest based on fund past performance, investment theme of the fund, fund manager, market conditions etc and not based on NAV value.
Myth 3: You can invest only large amounts thorugh mutual funds.
Fact: You can invest amount as small as Rs 500/- per month through SIP mode.
Myth 4: Profit from any Mutual fund investment is taxable.
Fact: Profit in equity mutual fund is tax free if you hold your investment for period greater than 1 year. Equity mutual funds which invest minimum 60% of their corpus in equity shares qualify for this exemption.
Myth 5: Demat account is required for investment in mutual funds.
Fact: Demat account is not mandatory to invest in mutual funds, you can invest through directly through fund house website or through financial advisors, banks, brokerages etc.
Myth 6: Mutual funds are risker than shares.
Fact: Mutual funds invest into different stocks (at least 20stocks) which is less risker than investing in individual stocks. Mutual fund managers regularly keep track of market and economic conditions so they are better to position to decide when to buy/sell.
Myth 7: Mutual funds which declare regular dividends are better.
Fact: Dividend is declared in funds with dividend option only and when a dividend is declared there is equivalent fall in NAV of fund. Dividend payout may give you regular income but your investment will lose benefit of compounding which is possible in growth funds.
Myth 8: SIP’s are always better than lump-sum investment.
Fact: SIP investment is good option when market is volatile or when you do not have free cash for lumps-sum investment. In a rising market or for long term investment, lump-sum investment may be better option.
Myth 9: Mutual fund investment have high investment charges
Fact: If you investment directly with mutual house then no investment charges are applicable. If you invest through brokerage,agents etc then they will charge you nominal amount for their services. Even if one invests directly into shares then one has to pay brokerage and stamp duty and charges for mutual funds are comparatively lower.
Myth 10: Mutual Fund SIP investment makes mutual fund investment risk free
Fact: SIP is only a method of investment.Making monthly investment through SIP, helps you average out your buying price.SIP may reduce your risk of investment in mutual fund but it will not make it risk free.
Myth 11: Mutual fund investment has lock-in period and one cannot redeem investment easily.
Fact:Only tax saving (ELSS) mutual funds and closed ended mutual funds have a lock-in period, for other mutual fund investment there is no lock-in period. Kindly note exit load may be applicable on premature withdrawl for certain mutual fund investment depending on type and period of investment.
Myth 12: You can make quick gain by investing in mutual fund NFO same as stock market IPO.
Fact:In stock market IPO when stock lists on stock market there is price discovery and the listing price may be more than issue price. When listing price is greater tahn offer price you get listing gains.
In case of mutual fund NFO all units are issued at NAV of Rs 10, your contribution is used to invest in stock and debt instruments. When the NFO lists , the listing NAV is calculated based on the current value of all mutual fund investments and cash holding. Thus there is no opportunity for listing gain in mutual fund NFO through price discovery. If there is any listing gain then you would have got similar gains by investing in any existing funds.