There are a few myths that either hold back people from investing in mutual funds or lead to wrong investment decisions resulting into losses. Therefore, its better you educate yourself about these myths, than making a wrong investment choice.
1. Rs 10 Net Asset Value (NAV) means cheap
New fund offers (NFOs) are often mis-sold by distributors by highlighting their seemingly low NAV of Rs 10. However, believing that Rs 10 NAV is cheap is one of the biggest myths about mutual funds. The NAV of the fund only decides the number of units held by the investor. The higher the NAV, lesser will be the number of units and vice versa. Therefore, the net asset value of your fund at the time of investment is immaterial; what you should instead focus on is the growth recorded by the NAV post investment.
Paisabazaar’s take: Don’t blindly invest in a new fund offer or funds with low NAV, evaluate the fund before investing.
2. Dividend option is better than growth option in terms of returns
Most of the mutual fund offers two investing options — dividend and growth. In case of dividend payout option, the fund pays part of the gains to the investors at different time intervals. Therefore, dividend is not an additional benefit that you are getting but a part of your gains only. The NAV under the dividend option will always be lower than that of growth option as the NAV of the fund will fall to the extent of the dividend declared. Whereas, in the case of growth option, your gains remain invested in the fund and keep compounding over time.
Paisabazaar’s take: If you want to invest for the long term and don’t have any intermittent requirement of funds to support your income, opt for growth option. Also, always remember that dividend from mutual funds is not guaranteed; don’t rely on it if you need a regular flow of income.
3. Large number of funds means better diversification
One of the main reasons why people invest in mutual funds is to achieve diversification. As a good equity-diversified fund invests in different companies across sectors, it is sufficient to provide you the needed diversification. However, you need more than one fund in your portfolio to achieve diversification over fund managers. But that doesn’t mean that you start investing in large number of funds, it will be difficult to manage them. Plus, with small allocation to large number of funds the returns may also be diluted.
Paisabazaar’s take: Irrespective of the amount, we think you can limit the number of funds in the portfolio to 5 or 6 but if you are investing a small amount (less than Rs 5,000), you can consider opting up to 2–3 funds.
4. One always loses money by investing in mutual funds
If you invest in equity mutual funds for short term, there are chances that you might lose money. But over the long term, good equity funds have the potential to deliver 15% to 20% annualized returns. Thus, the possibility of losing money is very low.
Paisabazaar’s take: Don’t invest in equity mutual funds with the intention of making quick gains. Start your investment through an SIP and stay put for the long term.
Chart 1: Annualized returns of equity-diversified large-cap funds over different time intervals:-
5. Markets have risen sharply, I should wait for a correction to buy mutual funds
A common mistake that people do is that they believe they can time the market correctly. Even the most savvy investors haven’t been successful in getting it right every time when it comes to investing in equities. To avoid incurring losses due to incorrect timing, it is better to invest regularly and for the long term.
Paisabazaar’s take: As soon as you have the money, start investing in mutual funds as a few wise men say it is better to spend time in the market rather than timing the market.
6. One shouldn’t invest in small-size funds
A big asset base shows the popularity of a fund but it is no guarantee that the fund will always deliver better returns. Similarly, it is not necessary a small fund will always be a poor performer and a fund with big asset size will always deliver better returns. There are many examples of funds with a small asset base that have yielded good returns. In the end, what matters is the performance of the fund.
Paisabazaar’s take: Don’t ignore a fund just because of its small size. Evaluate and compare its performance with its peers; if the fund has a good track record, invest in it.