Mutual Funds: Five MF myths that can mislead you

Take an informed decision when investing in MFs, based on your needs, time horizon and risk appetite

Mutual funds have emerged as an effective financial instrument for building a corpus for different financial goals such as child education, marriage, home buying or one’s own retirement. From the types of funds, investing horizon to the returns that one may expect, separating the myths from the facts before investing in mutual funds helps. Here are some pertinent myths dispelled for better investing decisions.

Myth: Equity funds will give steady returns each year
Reality: Mutual fund returns are not assured and are linked to market movement of the underlying securities. Still, an assumption of 12%-15% annualised return over the long term is made when the growth rate in equity funds is referred to. However, it does not mean the growth of 12% will happen every year.

In reality, equities being volatile in nature may deliver both negative and positive returns over a period of time. The returns could be as high as 50% in one year but in the next year, the returns could be as low as 7% or even negative. Still over a long term, several studies done in the past have shown that equities drift upwards and the compounded annualised growth rate, i.e., an average return is what gets referred to.

Myth: All mutual funds invest in equities
Reality: One can invest across different asset classes such as equity, debt, gold, real estate though mutual funds. Based on one’s risk profile, goals and requirements, one may build an asset allocation plan by investing across mutual fund schemes and not necessarily in equity schemes. Ideally, equity funds help during the accumulation phase, while debt funds help to preserve accumulated capital nearing the goals.

Myth: Solution-oriented funds are apt for achieving goals
Reality: There are specific solution-oriented mutual fund schemes to save towards goals such as children education or one’ retirement. Such schemes, typically, have lock-in periods and invest in both equities and debt in varying proportions. In reality, opting for large-cap and mid-cap schemes may prove to be more beneficial than routing investments in solution-oriented funds, which are less flexible and carry lower potential for high returns.

Myth: Lower NAV is better than higher NAV
Reality: If you are investing in a mutual fund scheme with a lower NAV thinking it to be a better ‘deal’ than buying a fund with higher NAV, think again! Let’s say, you invest Rs 10,000 each in Scheme A (an NFO with an NAV of Rs 10) and Scheme B (an existing scheme with a NAV of Rs 20). In doing so, you hold 1000 Units of Scheme A and 500 units of Scheme B. Now, assuming both schemes have invested their entire corpus in just one stock, which is currently quoting at Rs 100, let us look at the fund value if there is an appreciation in NAV. If that stock appreciates by 10%, the NAV of the two schemes will also rise by 10%, to Rs 11 and 22, respectively. In both cases, the value of your investment increases to Rs 11,000—an identical gain of 10%.

Myth: Mutual funds are only for long-term goals
Reality: You can make use of mutual funds for meeting your short-medium-long term goals. For goals which are to be met within three years there are short term funds, liquid funds and several other debt funds where you can park funds for a shorter duration. Similarly, hybrid funds with exposure to both equity and debt come handy for medium-term goals. For goals which are at least seven years away, opt for equity funds. Based on your needs, time horizon and risk appetite, you can pick any type of mutual fund scheme.

FACTS VS MYTHS
There are MF schemes for various asset classes such as equity, debt, gold, real estate
Large-cap and mid-cap schemes can give better returns that solution-oriented schemes
You can make use of mutual funds for meeting all your short-medium-long term goals
Mutual fund returns are linked to market movement of the underlying securities