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25Facts & Myths about Mutual FundsJul-30-2019

Facts & Myths about Mutual Funds

Blog by – Mr. Ashish Ajmera
Investing in stock markets through mutual funds is a very useful and easy option for retail investors. Mutual funds investment has emerged as an attractive option in recent years. While the local equity markets have been soaring and hit record highs consistently, the participation through Mutual Funds also increased intensely. Ease of transactions, tax benefits and good returns drove a wave of retail investors into mutual funds for last few years. Systematic Investment Planning (SIP) has become a popular way of investing in financial markets and investors have been constantly looking for the best mutual funds to invest.

However, some misconceptions about the whole mutual fund experience continue to linger around in the minds of some people.  Here are a few pointers clearing the commonmutual fund myths

Mutual Funds require high amount of investment: This is not at all true. You can start investing mutual funds with just Rs 5000 for a lump-sum/one-time investment with no upper limit and Rs1000 towards subsequent / additional subscription in most of the mutual fund schemes. And for Equity linked Savings Schemes (ELSS), the minimum amount is as low as Rs500.In fact, one could invest via Systematic Investment Plan (SIP) with as little as Rs 500 per month.

You need expert opinions for investing in MFs:Mutual funds are primarily meant for of common investors who may lack the knowledge or skill set to invest in securities market. Mutual Funds are professionally managed by expert Fund Managers after extensive market research for the benefit of investors. A mutual fund is an inexpensive way for investors to get a full-time professional fund manager to manage their money. Getting the facts about mutual funds correct is most critical aspect of mutual funds investment.

Mutual Funds block your funds for a very long period:Mutual funds can be for the short term or for longer term based on one’s investment horizon and objective.Rather than hunting for best dividend stocks on your own, it is advisable to put your investable surplus in a sound mutual fund with high holding of such companies. There are different types of mutual fund schemes – which invest in different types of securities – in equity as well as debt securities that are suitable for different investor needs. In fact, there are various short-term schemes where you can invest for a few days to a few weeks to a few years.  While Equity Schemes are most suitable for a longer term, debt mutual funds are suitable for investors with short term (less than 5 years) investment horizon.

Mutual Funds offer exposure to equities only: Mutual Funds invest in stock market (i.e., equities), bond market (corporate bonds as well as govt. bonds) and Money Market instruments such as Treasury Bills, Commercial Papers, Certificate of Deposit, Collateral Borrowing & Lending Obligation (CBLO) etc. Many of these instruments are not available to retail investors due to large ticket size of minimum order quantity (such as G-Secs) and hence, retail investors could participate in such investments through mutual fund schemes.

Understanding movement of NAVs is tricky:  Net Asset Value or the NAV of a fund is nothing but a reflection of the market value of the underlying securities held by the fund on any day. A high NAV does not mean the fund is expensive. In fact, high NAV indicates a good performance of the scheme over the years.A mutual fund`s NAV represents the market value of all its underlying investments. NAV of a fund is irrelevant, because it represents the market value of the fund’s investments and not the market price. Any capital appreciation will depend on the price movement of its underlying shares/debt securities.

Outlook

Mutual funds have become one of the best and safe investment instruments for effective wealth creation, tax savings, and achieving financial wellness over a period of time. It seems that the mutual funds schemes would remain highly popular investment vehicles for parking funds in shares and every investor should know how to select good equity funds which would offer a good performance. Here is how an investor should go about using mutual funds in an effective manner for successful financial planning.  Before thinking about the best mutual funds to invest, it is critical to define your investment objectives in clear and measurable terms. This would ensure that you allocate sufficient funds to mutual fund investing.

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