As mutual funds grow in popularity, many myths have been associated with them. Read this post for common myths about mutual funds and the actual facts against them.
Mutual funds have become a popular investment option today due to their potential to generate long-term wealth. However, many people can still be apprehensive about investing in these funds due to some rumours and false information about these funds.
Following are seven common myths about these funds and their true facts to help you become more aware of their benefits.
Myth 1: Mutual Funds Require Huge Investments
While you can invest in a mutual fund via a lump sum, it’s not the only way. You can start your mutual fund investment with any amount you’re comfortable with through SIP. Most mutual funds allow you to invest through SIP starting with as low as ₹500- ₹1000. Even if you choose the lump-sum route, you can opt for a low investment amount based on your budget and goals.
But, What Is SIP?
Full form of SIP is Systematic Investment Plan. It is a method of investing in mutual funds. A SIP enables you to invest a fixed amount of money at regular intervals (e.g. monthly, quarterly, etc.) in a particular mutual fund instead of making a lump-sum investment.
One of the best benefits of a SIP is Rupee Cost Averaging. This means you can out the cost of your investment through different market cycles as you buy more units when the market is low and fewer units when the market is high, with the SIP amount being constant.
Myth 2: Mutual Funds Are Very Risky
All investments come with a certain level of risk, including mutual funds. However, mutual funds also carry the potential to beat inflation and appreciate your wealth if you can stay invested for a long period. Besides, risk levels can vary depending on the type of mutual fund you choose. For instance, every mutual fund can vary between very low and very high risks, which is mentioned in the scheme document. Therefore, it’s vital to understand the risks associated with each mutual fund and choose the right type of fund based on your investment goals and risk tolerance.
Moreover, most mutual funds are managed by expert fund managers who constantly track the fund’s performance and navigate market volatility.
Myth 3: Mutual Fund is Only Suitable for Long-Term Investment
While there might be some truth to it, the decision would depend on the type of mutual fund and your profile. For instance, equity mutual funds may be best suited for long-term investments as it allows you to ride through short-term market volatility better. However, there are debt funds that can help you achieve your short-term goals as well.
Apart from these, you can also select hybrid funds that give a balanced exposure to both equities and debts.
Myth 4: Investing in Mutual Funds is Complex
Today, investing in a mutual fund has become very streamlined. You must complete the KYC (Know Your Customer) process with your fund house or a SEBI-registered intermediary. It’s a one-time process that includes verifying your identity, address, and recent photograph.
Once the KYC is complete, you can invest in any mutual fund of your choice. Moreover, reputed asset management companies offer PAN-based Video KYC services, which you can complete from the comforts of your home.
Myth 5: You Need a Demat Account for Mutual Fund Investments
A Demat account is essential for directly investing in the stock market. However, you don’t need to open a Demat account to invest in a mutual fund. As mentioned in the previous point, first-time investors only must complete their KYC to invest in a mutual fund. Once done, you can buy mutual funds without holding any Demat Account.
Myth 6: Exiting a Fund Is Not Easy
An Equity-linked Savings Scheme (ELSS) comes with a lock-in period of three years. Moreover, some solution-oriented funds, like a retirement fund or children’s fund, have a lock-in period of 5 years. Apart from these special category funds, most other funds have a flexible exit policy. You can also stop and begin your SIP investments at any time, depending on your financial situation.
Myth 7: Mutual Funds are Not Good for New Investors
It is often believed that investing in mutual funds is not for new investors. The fact is quite the opposite. Leveraging the expertise of fund managers allows new investors to make smarter investment choices.
Moreover, the earlier you begin investing, the more time you get to benefit from the compounding effect, especially if you opt for the growth plan. Therefore, don’t wait for the future and start investing small amounts through SIPs from a young age.
In this age of information overload, it’s easy to get carried away by myths. Therefore, it’s crucial to be fully aware of the many advantages of mutual funds and shun the myths discussed above.