Explained | 10 common myths about mutual funds debunked

"A prevalent myth is that a substantial amount of capital is required to begin investing. However, this is not the case; one can start with a modest sum,” says Atul Parakh, CEO of Bigul.

Mutual funds myths debunked, Representative image. Source: Pixabay

Although mutual funds are more popular now than ever, with equities roaring to unprecedented levels and more retail investors joining the party by every passing year on Dalal Street, it is commonly a concept quite commonly misunderstood. Here are 10 most common myths about investing in mutual funds and what experts say about them to help you on your journey of becoming a more informed investor.

Myth 1: One needs a large sum to invest in mutual funds

"A prevalent myth is that a substantial amount of capital is required to begin investing. However, this is not the case; one can start with a modest sum,” says Atul Parakh, CEO of Bigul.

Echoing similar views, Bhuvan Rustagi, COO and Co-Founder of Per Annum and Lendbox, points out: "With the advent of technology, individuals can invest in mutual funds with as little as Rs 500 by signing up with any of the new-age online platforms.”

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Myth 2: One needs to be an expert in equities to invest in mutual funds

One doesn’t have to be an expert in equities to be able to make the most of investing in mutual funds.

Mutual funds are managed by expert fund managers who make decisions based on the mandate of the fund, market movement, and their expertise all to maximise returns for their investors, explains Rustagi.

Also watch: 10 common mutual fund myths debunked

Myth 3: One should only invest in mutual funds for the long term

There are several mutual funds available in the market designed with all sorts of timeframes in mind.

A mutual fund can be used to for long as well as short terms —it all depends on the investor’s goals, say experts.

Myth 4: Guaranteed return

This is quite a common myth, and a risky one.

"While mutual funds tend to provide stable returns, they in no way guarantee returns as the underlying assets do not provide guaranteed returns," says Rustagi.

Myth 5: One needs a Demat account to invest in mutual funds

Investors do not need to hold their mutual fund units in Demat form, except with respect to exchange-traded funds (ETFs), according to the Association of Mutual Funds in India (AMFI), the nodal association of mutual funds in the country that provides data and insights on investments in mutual funds.

Myth 6: Higher past returns ensure future achievement

You may have heard the following while exploring the world of mutual funds:

“Past performance is no guarantee of future results.”

Investors' higher past returns do not ensure future achievement as market conditions change, and verifiable execution may not be demonstrative of future outcomes, explains CA and independent startup advisor Manish Mishra.

Myth 7: Mutual funds invest solely in stocks

Bigul’s Parakh highlights that mutual funds don't just invest in equities but offer a diverse range of investment opportunities, including debts and various other financial instruments.

Myth 8: Mutual funds are not meant for young investors

Early investment helps young investors build wealth over a long period of time and inculcate a habit of saving and investing, hence mutual funds are not for young investors is nothing but a myth, say experts.

Myth 9: Actively managed funds beat passive ones

Studies reveal that in due course of time, many effectively managed funds fail to meet the expectations of their passive counterparts because of higher expenses, points out CA Mishra.

10. The lower the net asset value (NAV) the better

“NAV is a function of the valuation of all underlying stocks. So, whether the NAV is low or high, it won't give any insight into whether the fund is good or bad,” explains Amar Ranu, Head-Investment Products and Insights at Anand Rathi Shares and Stock Brokers.

How to tackle these myths about mutual funds

Experts suggest the following in order to avoid falling into the trap of these common myths in an effective and timely manner:

-Research and training

-Set realistic expectations

-Embrace a long-term perspective

-Keep away from imprudent choices during market fluctuations

-Inspect and rebalance the portfolio from time to time

-Keep expenses low by picking low-cost funds

-Remain informed

-Connect with mutual fund distributors/advisors from time to time

-Look for exhortation from financial experts

-Gain knowledge about mutual funds, their mechanisms, and the financial market as a whole regularly

-Understand the basics of mutual funds and the diverse options available

DISCLAIMER: The views and investment tips expressed by investment experts on zeebiz.com are their own and not those of the website or its management. zeebiz.com advises users to check with certified experts before taking any investment decisions.

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