Many investors, especially those who are new to the investment world, find themselves scratching their heads over the dilemma of whether or not they should invest in a particular stock. So, today we are here to bust the most common myth that will help your decision-making process a bit more ‘clearer’.
Without further ado, let’s bust 5 common myths about Mutual Funds Investment:
Myth 1:
Mutual fund investments require long-term commitment:
Truth: Many investors lay off investing because they think that mutual fund investment requires long-term commitment exclusively. However, that is not the case; all mutual fund investments vary in nature and require varying degrees of commitment.
The best advice for investing is that you should keep your goal in mind, coupled with the willingness to take risk and expected returns.
Clarifying these basics makes it easier for your fund manager to choose and add the right mix of funds to your portfolio. Moreover, your goals decide how long you need to commit to your investment.
For example, it is quite obvious that you will need a larger corpus for retirement than to buy a car, and hence will need to commit longer for Retirement Investment goal than for investment towards a car purchase.
There are several types of mutual funds and each of them comes with a different level of Risk, Liquidity and Flexibility, Horizon etc. So, here is a sneak peek into some common goals and the best suited Mutual Fund Scheme category for those goals:
|
Common Goals |
Investment Horizon |
Best mutual fund option |
|
Buying a Car |
Short term |
Short term funds/ debt funds |
|
Saving for a holiday |
Short term |
Liquid funds |
|
Home renovation within next 1 to 2 years |
Short term |
Short term funds/ debt funds |
|
Passive Income/ Regular Payouts |
Short to Medium-term |
Systematic Withdrawal Plan (SWP) in the chosen Mutual Fund Scheme |
|
Tax Planning |
Medium-term |
|
|
Children’s education |
Long term |
Index funds/ Balanced funds/ Gold funds |
|
Children’s marriage |
Long term |
Index funds/ Balanced funds/ Gold funds |
|
Retirement |
Long term |
Equity diversified mutual funds/ sector or thematic funds |
Myth 2:
The best performing mutual funds are the most ideal ones to add to the portfolio:
Truth: Mutual fund market is inherently Volatile. This means that the positioning of the fund may or may not vary, depending upon the market scenario. So, the best performing mutual funds today may not be able to sustain the title in the upcoming time and vice versa.
Keeping this in mind, it would not be wrong to say that in terms of Mutual Fund Investment, the difference between ‘good’ and ‘best’ is only marginal, and it evens out on a longer term.
Having said that, the best performing Mutual Funds are not always the best ones to add to your Portfolio, and the funds with falling market prices are not always bad!
Since price is only one part of the investment equation, you need to look at all other aspects as well, such as Past performance, Probability of underestimation of the value of the Firms, Ownership Qualities etc. before making a decision.
Once you have analyzed all these aspects, you will be able to realize if a stock/ fund is undervalued. And, in that case, go for those stocks/ funds as it will allow you to get the valuable ones at an Undervalued Price.
As a matter of fact, even the greatest investor Warren Buffet follows value approaching for investment. However, one thing to keep in mind is that any investment that you make must be in sync with your Objective, Risk Appetite, and Return Perspective.
Myth 3:
Mutual fund is the best asset class:
Truth: Many people compare mutual funds with Equities, Real Estate, Fixed Deposits, SIPs or lumpsum investments, not realizing the fact that mutual funds are a way to supplement all of these and not an Asset Class themselves. So, if you are looking to invest, do remember that mutual fund itself is not an asset class; it is an investment avenue/ vehicle instead.
- An Asset Class is a group of securities that behave similarly in a marketplace, portray similar characteristics, and are bound by the same rules and regulations.
- A mutual fund is an investment vehicle that allows you to invest in different Asset Classes.
For better clarity, here is a list of different asset classes and their common investment avenues through Mutual Funds are:
|
Type of Asset Class |
Mutual funds |
|
Equity |
Mar cap funds, Diversified funds, Tax saving Funds |
|
Debt |
Short term and long term debt mutual funds |
|
Commodities |
Gold mutual Fund |
|
Real Estate |
Sectoral Funds |
|
Cash |
Liquid Funds |
Myth 4:
More the mutual fund schemes in one’s portfolio, the more Diversified the Portfolio is:
Truth: Contrary to popular notion, diversification of portfolio does not equate to having as many mutual funds in your portfolio as possible. Diversification, actually, refers to investing in different asset classes depending on your risk appetite.
The optimal number of mutual funds for the purpose of Diversification is 5 to 7.
Anything more than that will lead to ‘over-diversification,’ which, in fact, nullifies the objective of diversification.
Your focus should be on spreading your risk over different Asset Classes and time periods, and not just on collecting more mutual funds in your portfolio.
This is because most of the schemes contain similar stocks/ funds and by investing in too many schemes you may end up owning a big portion of the stock market/ particular asset class. In such a case, if the market crashes, you will end up getting lower returns than expected.
In addition to this, over-diversification usually results in schemes overlapping. This makes it inherently difficult to manage the portfolio and does no good to the portfolio.
Myth 5:
One needs to be market savvy and well-read to invest in mutual funds:
Truth: While it is true that investing blindly is like diving head-first into a brick wall, those anticipating investment need not be afraid of entering the market on the basis of education level or market-savviness.
You do not need to be an expert or have a lot of time to start investing in mutual funds. In fact, you can start at any given moment with the help of dedicated FinTech and apps.
For instance, 5nance has created a user-oriented interface that understands your needs first. So, when you do decide to start investing, you get a recommended list, personalized to suit your investment profile, risk capacity and individual goals.
Another exclusive 5nance benefit is that you can leverage complete transparency; there is absolutely no hidden agenda or fee. Your data is handled with safety and confidentiality using the 256-bit data encryption and military-grade security.
Last but not the least, if you still fear losing money, you have the option to start small with schemes like SIP (with an initial investment as low as INR 1000), and increase your investment gradually as you gain confidence.
