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    Dispelling Common Misconceptions Surrounding Mutual Funds

    Transcript

    Nov 07, 2023
    5 Mins Read

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    Investing via mutual funds has gained popularity over the years. Over the last decade the value of assets has soared, crossing Rs 46 trillion in July; in the last three years, the industry clocked in a compounded annual growth rate of nearly 20%. (Source: Financial Express).

    But as our Managing Director and CEO A. Balasubramanian told a leading publication in a recent interview, “There is huge scope for further penetration because there are only about 40 million unique MF investors, which is less than 10% of the 500 million PAN holders that we have”.

    The industry has taken many significant initiatives to demystify mutual funds for investors and spread awareness. Here’s looking at a few common misconceptions surrounding mutual funds that may discourage investors from investing in mutual funds or lead to investing errors. Thus, it’s necessary to elaborate on the common realities surrounding this investment vehicle and bust some myths.

    Myth 1: Mutual fund is capital intensive.


    Reality: Investment in mutual funds is affordable in nature, thus making it feasible for individuals of all income levels to invest in the same. There are two ways one can invest in a mutual fund, lumpsum or through a Systematic Investment Plan (SIP). An SIP allows for investing on a monthly basis with an amount that is feasible for an investor. It can initially be done with a small amount and the same can gradually be increased, depending on the investor’s convenience and risk ability. There is no maximum amount for investment in mutual funds.


    Myth 2: Mutual funds carry zero risk.


    Reality: Mutual funds carry varying degrees of risk depending on the extent of asset allocation. Some carry a high-risk high return scenario, while some may have a low-risk low return scenario like debt mutual funds. It is important to align investment decisions with the level of risk tolerance of the investor.

    Also, mutual fund products carry clear risk labelling so always read scheme related documents. One must understand that investing in asset class that have the potential to generate significantly high returns will carry some risk.

    That is the nature of financial products. Asset classes perform differently at different time periods based on macro and micro conditions.


    Myth 3: Mutual funds guarantee high returns perpetually.


    Reality: Remember the sentence, “Mutual Fund investments are subject to market risks, read all scheme related documents carefully.”? It is meant for this reason.
    Depending on factors like market conditions and the extent of investment in mutual funds, the same provides returns for the investors. Their performance is linked to the performance of the assets present in the portfolio. Even the returns on the assets in the past are not indicative of returns in the future.

    Knowing this would ensure that one doesn’t carry unrealistic expectations from one’s investments in a market-linked product and exit investments with the faintest sign of underperformance. Time is important in the market to let compounding play out through market cycles.


    Myth 4: Mutual funds are only for the long term.


    Reality: Mutual fund investments can be both long-term and short-term, based on what is one’s investment objective and time horizon. There are many funds in which one can invest considering long-term financial goals, while there are some that can be done for short-term objectives. Mutual fund schemes invest in different kinds of securities in both equity and debt, that are suited for varied investor priorities.

    Based on the time horizon for money and the risk appetite, the fund type and duration decisions can be taken up. Typically, equity investments are better suited for the longer term, while debt mutual funds with varying durations can be used for short-term investments. While time in the market is an important factor to let compounding play out, mutual funds provide ample variety to investors to design their portfolio for both short-term and long-term needs.

    For e.g., Liquid Funds that invest in debt securities of less than 91 days can be used to park surplus money instead of letting it stay idle.


    Myth 5: Start early to invest in mutual funds.


    One is never too old to start anything new, and it is applicable to mutual fund investments as well. However, investing young is preferable as it’s easy to leverage the time in hand to accumulate wealth over a certain time period. The earlier you start the longer time you get Reality: for compounding to play its part. However, if you haven’t started early don’t feel you have missed the bus. You can still make your money work for you by selecting the relevant asset class as per your goals and risk appetite.


    The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers.


    Mutual Fund investments are subject to market risks, read all scheme related documents carefully.



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