Common Myths in Mutual Funds

When Priya and Ravi sat down to talk about mutual funds again, Priya acknowledged, "You know, I used to think mutual funds were only for people with a lot of money or those who understood the stock market." "I thought they promised returns!" laughed Ravi. However, after my research, I discovered how many false beliefs people have about mutual funds.

They decided to work together to dispel these myths and reveal the realities of investing in mutual funds because they were both curious.

One misconception is that mutual funds are only for the wealthy. In actuality, the initial investment can be a reasonable amount of money. A modest amount can be invested in a range of assets. Mutual funds allow monthly investments as low as ₹500 through SIPs (Systematic Investment Plans).

Another myth is that mutual funds guarantee high returns. While mutual funds can offer good returns, there is no such thing as a "guaranteed" return. The value of the fund depends on how the underlying assets perform. If the market does well, the fund’s value can increase, but your investment may decrease if the market struggles. It’s important to understand that mutual funds, like any other investment, come with risks. However, they are generally less risky than individual stocks because they diversify your investment across various assets.

Mutual funds also need to be simplified for understanding. But they are quite simple once you get the hang of it. Mutual funds pool money from several investors and invest in different types of securities. The professional fund manager handles everything, so you don’t have to pick and choose stocks or bonds yourself. All you need to do is choose the right fund that aligns with your investment goals.

Another common myth is that investment in mutual funds would tie you up with your money for a very long period. Most mutual funds have no lock-in period, though some have it. Your investment can be redeemed at any time, though at a cost due to the possibility of applying exit fees. In the case of equity fund investments, though holding it longer would make it more fruitful to earn on compounding and growth of the market, the funds would get locked in for some time.

There’s also a myth that mutual funds consistently outperform the stock market. The fact is that while mutual funds can realise pretty solid returns, they do not consistently outperform the market. These actively managed funds could be behind their passive counterpart, such as index funds. It is, therefore, not a foregone conclusion that all mutual funds will consistently outperform the market. Some funds may not fare well, especially if the fund manager makes poor choices. Understanding a fund before investing in it is always worth studying.

They also think that mutual funds are just like stocks, though there are similarities. However, mutual funds are a lot safer because they will diversify your investment through many different assets. This makes it less risky for you since if one stock or bond fails to do well, it is easily compensated by others. In stocks, however, everything depends on one company's performance, which means a high level of risk.

Lastly, mutual funds apply to long-term investments alone. Although they are perfect for long-term growth, you could invest in them for some period, provided you pick the appropriate type of funds matching up your time horizon and the ability to bear the occurring risks. Investors seeking faster returns may benefit from funds designed to deliver results over short investment periods.

Conclusion:

With these myths clarified Priya felt more confident about investing in mutual funds. "I thought one needs to be super-rich or an expert to invest in it." Ravi again nodded, "Exactly. Knowing the reality of those will help us make wiser choices.

The following chapter is on corporate bond funds, an interesting variant of debt investing. These are funds that offer a regular income with a capital appreciation component.