Uncommon Myths about Mutual Funds Busted

While common myths about mutual funds explain to you certain misconceptions investors have while planning for a mutual fund investment, uncommon facts about mutual funds will help you get away from some of the financial misinformation about MF so that you take a well-informed decision even if you are a beginner investor.

Myth 1: MF/ MF SIPs are risk-free

Fact: No investment in the markets is risk-free and as such MF investment either in lump sum or in a SIP. Although it minimises risk through diversification in different companies and sectors, but cannot provide completely risk-free investment growth.

Myth 2: MF schemes which did well in the previous 5/10 years will do well 10 years hence also

Fact: Just like stocks, MFs are also dependent on various political, legal and economic issues at national, international, sectorial levels. So what might have been true during 2008-2012 would not be the scenario today and what is true today might not be the same 10 years hence. Business cycles keep changing. And so, if the last 5 years have been promising doesn't necessarily mean that there’s no reason for the economy and, thus, the markets move downwards in the future.

Myth 3: Five-star rated mutual funds always perform well

Fact: Many investors and more so, beginners tend to believe that the stars-rating they find for a MF scheme on websites really indicate that they would never flop. No, that’s not right. Stars might just mean that a fund has been doing well in the previous financial quarter or in the last 1 year or is a brilliant scheme that charges less expenses and yet provides decent returns and so on. Hence, it is nowhere an indication about the future or its performance.

Myth 4: I can’t realise short-term profits in MF

Fact: This depends on the type of MF you have chosen. If you have chosen a small cap/ mid cap/ an arbitrage funds scheme that takes higher risks than a blue-chip fund & a large cap fund then there are high chances of realising short term profits through MF too.

Myth 5: Expenses on MF make stock investments seem cheaper

Fact: Expenses we pay on our MF investments can be largely reduced by our choice of investing in a direct MF plan rather than a regular plan.Secondly, the expenses are a compensation for both: the lack of knowledge of handling direct stock investments and minimising risks of stock investments, through a professionally managed investment. So unless you are ready to risk your money completely, MF are the best way to keep your money well-diversified with a risk level that matches your risk appetite and is still earning you the best returns.

Myth 6: I can invest in a mutual fund and forget about it for next 5/10 years

Fact: This kind of investment psyche doesn’t hold good for any kind of investment. Once you have put in your money you need to be all the more careful to see if you have made the right decision or if there’s a sudden crisis due to which your investment may suffer. In that case you will have to be on your toes and be aware of the times when you will have to make a shift or a modification in your MF investment. [Read- know when to exit a MF]

Myth 7: Mutual fund schemes cover only domestic markets

Fact: This is no more the case as economies and MF regulatory bodies of many countries have opened up and are investing abroad and also welcoming foreign investments. So, you can still be in the US and invest in a mutual fund that consists of securities of companies that operate in another part of the world, say the developing economies of Asia.

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