Mutual funds are the most popular investment tool to achieve one’s financial goals. But, most investors lack adequate knowledge to invest in mutual funds. Mutual funds are an inexpensive route to invest in securities market. Mutual funds are the best way to achieve long term investment goals as well as best wealth creators. There are several myths associated with mutual funds. For instance, many investors think investing in a mutual fund is as good as investing in stock markets and that mutual funds are equity products. Less than 2% of the people invest in mutual funds, and this is largely because of several myths. This article tries to bust the myths associated with mutual funds.
1. Opening of a Demat Account: The myth is opening a Demat account takes huge chunk of time and paperwork along with frequent visits to a bank. You don’t need to open a Demat account for investing in mutual funds. Demat account is essential when actual stocks or shares are to be purchased. Mutual fund merely requires the investor to fulfill KYC norms and a bank mandate for creating a portfolio.
2. Mutual Fund equals to high risk is another common myth. This myth comes from the apprehension that mutual funds rely heavily on equity market and investor may end up losing all the money if the market crashes. First, mutual funds do not invest only in equity market, but also invest in debentures, bonds, government securities, commodities like gold etc. This provides investors with option to create a portfolio even by investing small amount like Rs 100. Second, equity based mutual funds are risk driven, but it depends upon the scheme of mutual fund, the fund manager switches the fund to protect the investment.
3. Mutual fund requires huge money is another myth. In fact, mutual funds are the best way to invest in costliest scrip or unit by investing as little as Rs 100. Mutual fund schemes clubs resources of different investors and invests equity, debt, money market or other markets to earn profits. These profits are after deduction of the fund manager’s fees and other expenses distributed amongst the investors.
4. There is also a myth suggesting mutual funds are risk free. The truth is any mutual fund carries certain amount of risk, depending upon the instruments and the fund. Therefore, mutual funds which invest in equity possess higher risk compared to funds which invest in debt or government securities
Therefore, it is advisable to invest in funds according to needs and risk taking capacities.
5. All mutual funds investments qualify for income tax deductions is another myth. Sometimes an investor merely invests in mutual funds, assuming it can provide basic tax relief. However, only Equity-Linked Savings Scheme (ELSS) funds provide tax relief under Section 80C of the Income Tax act up to Rs 1.5 lakh per financial year. This tax relief further comes with a three year lock-in period where investors cannot liquidate the fund amount. Not all funds qualify for tax relief. In order to avail this relief, the investor has to bear the lock-in phase.
6. Only an expert can be a mutual fund investor is another myth. It is necessary to do study before you invest in any mutual fund. There are financial advisors and fund houses to help you clear your doubts.
7. Mutual funds which invest heavily in shares of companies need some time to grow. Whereas fund which invests in debt or money market instrument do not need much time to grow, although the returns could be lower. Liquid fund is another example where long term investment is futile. Investment in mutual fund is and has always been the safest bet. Ignore the myths and explore the options yourself and fulfill your dreams. (The author is head of Money Mantra, a Mumbai-based financial advisory firm. He can be reached at firstname.lastname@example.org)