Mutual Funds Investing: Is It That Hard?
Do you get heavy thoughts after hearing words like mutual funds, SIP, investment, etc.? Do you start feeling that this is not your thing? In reality, this is because you have either incomplete information about these things, or whatever information you have is wrong. Despite the regular advertisements of the Association of Mutual Funds in India (AMFI), people still have many misconceptions about investing in mutual funds, which we will try to clear today.
Following are some of the most common misconstructions about mutual funds.
- You need to be an expert to invest in mutual funds
Investors often avoid mutual funds as they do not know much about it. There is a common argument, ‘I don’t understand these.’ It is a wrong argument that you need to be an expert to invest in mutual funds. The reality is that mutual funds are the best option for those who do not understand investing. In this, your money is managed by professionals and the person do not have to worry about which shares to buy and when to sell. In this, the fund manager chooses the stocks for you.
- How much to invest
The second myth is related to the quantum of investment. Many investors feel that they need to invest a huge amount in mutual funds to earn good returns. This is not right. You can invest Rs 500 per month through SIP. Gradually you can increase your investment. In such a situation, if you have a small amount, then do not hold back from investing.
- Mutual funds invest money only in stocks
Investors who do not have much knowledge of mutual funds often assume that the funds invest only in equities. If there is volatility in the equity market, it will sink their money in mutual funds. You should know that debt mutual funds account for 66% of the assets and management of mutual funds. Equity mutual funds account for only 32 per cent of the market. In such a situation, if you want higher returns and better tax benefits, but want to avoid the risk of equity mutual funds, then you should invest in debt funds.
- You can’t go wrong with five star rated funds
In this, past performance does not guarantee future returns. Mutual fund trackers such as Value Research and Morning star give ratings to funds and this gives investors some ideas. However, keep in mind that this rating is subject to change. A five-star fund can convert into a three-star or two-star fund, depending on its risk-adjusted performance and volatility in returns.
- SIP is the name of an investment product
A lot of people think that “SIP” is the name of some investment products other than mutual funds. So they say – “I want to invest in SIP”. However, SIP means a systematic investment plan, which just means a way to regularly invest only in mutual funds. In this, a pre-fixed amount is automatically deducted from your account and gets invest in mutual funds on a pre-defined date.
- I can’t stop SIP in between once I start it
Another myth that stops investors from entering mutual funds is that they think starting SIP for X years, is a commitment they can’t break in between and they will face some penalty if they stop their investments.
A lot of people do not want to give any PROMISE of regular payment. However, the truth is that once you start the SIP, you can anytime stop the SIP in between. So don’t worry while starting the SIP for the next 5, 10 or 30 years. The day you want to stop it, it can be stopped with just one notification!
- Lower NAV is cheaper than higher NAV
Most of the mutual fund’s investors think that a smaller NAV mutual fund is a better deal compared to a higher NAV mutual fund. While this may be sometimes true in case of stocks because a Rs 10 stock has the potential to grow faster than a stock with Rs 10000 stock value.
But in case of mutual funds, NAV has no significance. It’s ZERO!
Because your mutual fund’s appreciation has everything to do with the appreciation in NAV value in percentage terms and not an absolute value. I mean if you invest Rs 10 lacs in a fund with NAV of Rs 10, and if the mutual fund performs great and in the next 5 yrs it doubles in value, then the NAV will rise to Rs 20 and your fund value will rise to Rs 20 lacs.
However, if the NAV was Rs 10,000 per unit, still the effect would be the same for you. The NAV would have increased to Rs 20,000 and your value would have increased to Rs 20 lacs. No difference as such. So stop thinking that a fund is better (especially NFO’s) just because its NAV is lower.
- Dividend in mutual funds is better than growth option
When you choose a mutual fund to invest, you have to choose between the dividend and growth option. Now a lot of investors think that dividend option is better because they are getting “extra dividend”. However, it’s not true.
Dividends are not extra!, The NAV comes down by that margin after the dividend is paid, on top of it, if the fund is not an equity fund, a dividend distribution tax is first paid by AMC, which lowers the return of the investor. However, in the case of growth option, the money remains in the fund itself.
- Mutual funds means stock market
One of the most common myths is that mutual funds are highly risky because they invest in stocks. However, this is half true. Only equity mutual funds invest in stocks and are risky (in fact volatile is the right word, not risky).
There are other categories of mutual funds called debt mutual funds, which do not invest in equities. They invest in bonds, govt. securities, and other secured investments. While debt funds have their own risks and even their returns are not 100% stable, still, debt funds are highly stable when it comes to returns and often provide better tax-adjusted returns then most of the bank fixed deposits.
- You have to invest big amounts in mutual funds
Many small investors stay away from mutual funds and stick to recurring deposits and other products because they think that mutual funds are for big investors and one has to invest big money in it. However, you can start a monthly investment of even Rs 1,000 per month in most of the funds. If you want to invest on the onetime basis, the limit is Rs 5,000.
So someone who is just earning Rs 10,000 per month and wanted to invest 10% of his income, can also start mutual funds SIP.
- Mutual funds are always for long term
Mutual funds are marketed as long term investments most of the time. However, it’s not always the case. There are mutual funds called liquid mutual funds and even short term debt funds which can be used for short term investment horizon like 6 months or 2 years.
Only in case of equity mutual funds, it’s suggested that one should invest from a long term perspective to reap the maximum benefits.
- Mutual funds offer guaranteed returns
No, Not always. Actually never!
Mutual funds never offer a guaranteed return like a fixed deposit. This is one reason why many investors who are totally in love with “assurity” shy away from investing in mutual funds.
Various categories of mutual funds offer various return range. An equity mutual funds can offer return anywhere from -50% to 100% return in a year (just a high level estimate). However, a debt fund can also deliver a return ranging from 5% to 15%. And a liquid fund will mostly give a return in range of 6-8%
So the returns are not guaranteed, but highly probably within a range depending on its category. Also note that as the investment horizon shifts from 1 year to 10-20 years, the probability of getting a stable return within a range increases.
- I will lose my money if the mutual fund’s company goes bankrupt
This is common thinking, but not true. Mutual funds are highly secured in terms of structure. The way it’s designed and regulated by SEBI, it’s almost impossible for investors to lose money due to a scam or AMC going bankrupt. Your mutual fund’s units does not lie with AMC (it just takes the decision of buying and selling). Units and all the money lies with the custodian and highly secure.
- Past returns in mutual funds indicate future returns
Not correct. While past returns can surely tell you that the fund did very well in the past and there is some probability due to legacy that it will perform well. But it’s not written on stone.
- More mutual funds means diversification
Diversification is an ill-treated word, at least in mutual funds. Just because you invest in more mutual funds does not always mean that you have achieved diversification. The reason is simple. A mutual fund invests in close to 50-100 stocks. So when you invest in an equity mutual fund, your money is already well diversified across sectors, types of companies, etc. When you add another mutual fund, most of the stocks might be the same and also in the same proportion, giving you very little extra diversification.
- I can start SIP and forget it for long term
A lot of investors think that once they have started a SIP investment or even lump sum investment, they can just sit back and relax for the next 10-20 years. This is not suggested.
Mutual funds need constant review every year. So you should at least keep an eye on your fund performance. Do not overdo it and start looking at weekly and monthly returns, but do that in 1-2 years.
- SIP can be done only on a monthly basis
No, an SIP can be done even on a weekly or quarterly basis. While monthly SIP is the most suitable for all (we all get monthly income), but at times if you want to invest on a quarterly basis or weekly basis, even that can be done. However, note that it depends on a mutual fund if it gives you the facility of weekly/quarterly SIP or not. Most of them do, but at times, some mutual funds might choose to not have that option.
- Mutual funds investments are complicated
While investing in mutual funds is definitely not as simple as creating a fixed deposit, it’s not too complicated. You need to do a one-time documentation to start with and once it’s done, you can buy/redeem mutual funds online.
- I can’t add more lump sum amount in my fund where I do SIP
A lot of investors feel that if they have started a SIP in a fund XYZ, then they can’t add additional money in the same fund under the same folio. It is not true. When you invest in a fund (either SIP or one time), you get a folio number. This is like an account number. You can anytime add any amount of fund to the same folio.
- You need documentation every time you want to invest in mutual funds
Again a big myth. Once you are done with the first time documentation, after that every time you want to invest and redeem or switch, you can do it online. The documentation comes into picture only when you want to do changes like your email id, phone or address, etc.
- Mutual funds are not for retired investors
This is entirely false. There are various kind of mutual funds which are suitable for retirement needs. You can invest your hard-earned money in debt funds and keep them secure while it’s growing at a decent return. One can choose an option for a monthly dividend and get an income.
- I can’t invest in mutual funds because I need high liquidity
Again a myth. Mutual funds are highly liquid and you can get your money ranging from instant redemption to 3-4 days depending on the fund type. If you want very high liquidity, then you can invest money in liquid funds, from where you can redeem in 24 hours.
- I can’t skip an SIP payment once started
A lot of people are worried about what will happen if they skip the SIP in a particular month when they are low on funds?
If your bank account does not have sufficient money for a month, then on the SIP date the SIP will not get processed, but from next month it will go fine again. Mutual funds companies does not charge any fine or penalty for this, but your bank can levy a small charge for this like Rs 200/300.
I think it’s good, because that way you will be disciplined enough to make sure that your SIP’s go on time, but also does not hurt you too badly in case of emergency.
- TDS is applicable when mutual funds are sold and redeemed
Mutual funds are not like fixed deposits or recurring deposits. When you sell your mutual funds, there is no TDS which is deducted. You get the full amount in your bank account and then you need to figure out the tax amount and pay it later. However there is no exception to this. In the case of NRIs, if they redeem their debt funds, then TDS is applicable.
- My money will be locked in mutual funds like other products
Many investors think that in mutual funds their money is locked for a specific period. In case of mutual funds, most of the funds are open-ended funds, which means that you can invest any time and redeem anytime.
There is no lock-in except in ELSS funds (which comes under 80C) and close-ended funds (which specifically tell you the duration for lock-in).
- I can’t switch from one mutual fund to another fund
Many people do not know that it’s possible to move from one fund to another fund across the same fund house. You don’t need to sell the fund, get the money in your account and then again invest in another fund of the same fund house.
- Mutual funds of bigger and trusted brands are always better
Do you know that LIC also has mutual funds business?
However, LIC mutual funds are one of the worst-performing funds across the whole MF industry. LIC mutual funds are not the same as LIC insurance.
In the same way, SBI mutual funds should not be confused with SBI bank. A lot of first-time investors in mutual funds investors want to go with trusted brands like LIC, SBI, or HDFC.
- I can’t partially withdraw from mutual funds
Yes, you can. Mutual funds can be redeemed in parts. You just have to choose the number of units you want to redeem or the amount you want to redeem (it will calculate the units required). So that way, it’s a great product. Because in case of deposits it’s either the full amount or none.
Source courtesy: Jago Investor