10 General Myths regarding Mutual Fund Investments

02 Dec

10 General Myths regarding Mutual Fund Investments

Below is a list of 10 common myths about mutual fund investments:

Investment in mutual fund (MF) is always dangerous: No, it is not. The mutual fund is not essentially all about equity or stocks. Mutual funds also deal into debt instruments like Certificate of Deposits (CDs), Bonds, Govt. Securities (G-Sec.), Non-convertible Debentures (NCDs) etc. This means that a mutual fund scheme can also have all or some of these debt instruments in its portfolio. Various debt instruments have different maturity periods. MF schemes which are having debt papers of very little duration are slightest risky. Such schemes are known liquid MF schemes. These schemes can be as secure and as liquid as your savings bank a/c. Also cautiously selected debt MF schemes can be as secure as fixed deposits all along with better tax-adjusted return.
Investment in MF requires demat a/c: No, it does not. Although equity MF scheme does spend into stocks of companies, but you require not to have a deemed a/c to hold units of such MF schemes. All you require is to be KYC compliant (i.e. having PAN and valid address proof) and have an active bank account. That’s it.
Investment in MF requires timing the marketplace: No, you require not timing the market if you are investing for long term through Systematic Investment Plans (SIP) i.e. investing a small amount at regular intervals for a number of years. If you do that then, your savings will reap the advantage of rupee cost averaging i.e. buying more units when price is low and buying lesser units when price is high by investing similar amount every time.
Higher unit value (NAV) means an expensive purchase: No, it does not. Permit me provide you an instance. Presume you asked me, the rate of inflation in last 2 financial years (FY) and I told you that in FY 2013-14 cost inflation index (CII) stood at 939, and in next two FYs CII values were at 1024 and 1081. Does it mean anything to you? No. It would have helped you instead if I had told you that in last two FYs rates of inflation were 5.57% (FY 2015-16) and 9.05% (FY 2014-15). So what matters is percentage of relative change and not the value itself as the base values in cases of both inflation (at 100) and mutual fund NAV (at 10) are assumed for ease of considerate and measurement. So look at yearly growth rate of a scheme’s NAV rather than NAV itself. If it’s constantly thrashing its standard goes back then it’s worth taking into consideration.
Having many schemes in portfolio means diversification: Keep in mind one basic advantage of a mutual fund scheme – the diversification that it offers. Say, I am investing in a straight line in stocks of companies and with the money that I contain, I buy two stocks. On the contrary, you are investing in MF. In that case, with the same money that I have, you bought some units of MF scheme and that MF scheme’s portfolio may consist of many stocks, say, 30 stocks. So your investment portfolio is much more diversified than mine. Now, while a single MF scheme offers me sufficient diversification, investing more into alike type of schemes will not make a great deal sense. But I can certainly buy a few other types of schemes to get exposure into dissimilar types of investment styles.
Returns from all MF investments are taxed in the same way: If in portfolio of a MF scheme, percentage of contact into equity type of instruments is extra than or equal to 65% – such schemes are then known as equity schemes. Similarly if percentage of exposure into debt type of instruments is more than or equal to 65% – such schemes are then known as debt schemes. Equity schemes and debt schemes are taxed differently. Taxing also depends on how long you hold the investment before you sell. If equity schemes are sold after holding for more than a year – then NO tax is to be paid. If debt schemes are held for more than three years then on indexed gain 20% tax is to be paid. If investments are held for shorter term then short term capital gain tax is to be salaried.
Redeeming from MF investment is an unwieldy procedure: No it is not. Investments can be redeemed anytime online or offline (signing on a transaction slip) provided it is not within the lock-in period (like in cases of ELSS or close ended scheme). Redemption sum will be credited to your registered bank account within a predetermined time period.
MF investment is mandatorily for long term: No, not essentially. There are other debt schemes (arbitrage fund, accrual fund, income fund) which can be held for short to medium term.
MF investment cannot be used for regular periodical income: No, it can certainly be used. Like you can provide systematically, you can also withdraw also from a scheme methodically i.e. withdrawing a fixed amount at a usual interval for a specified period or till the money lasts whichever is earlier. This is known as Systematic Withdrawal Plan (SWP). This is actually caring for retired people or for anyone who requirements regular income.
MF is full of strange abbreviations: Agree to some extent. But we should look into every abbreviation and recognize it fully – what it stands for. There are too many – NFO, NAV, SIP, STP, SWP, MIP, FMP, ELSS etc.

Share this Post

About the Author

Finheal

Persnal Loans in Cities

Home Loans in Cities

Business Loans in Cities

Car Loans in Cities

LAP in Cities

Mutual Fund in Cities

Credit Card in Cities