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Mutual funds are a popular investment option for individuals who want to grow their money without choosing individual stocks on their own. Still, many investors hesitate to invest because of common myths and half-understood information. These beliefs can create unnecessary fear or lead to poor investment decisions.
This article explains 5 common mutual fund myths. Understanding these points can help investors make more informed choices based on their financial goals, risk level, and investment period.
Key Takeaways
- Mutual funds are not only for market experts. Beginners can invest after understanding the fund's objective, risks, and costs.
- Professional management does not remove market risk. Mutual fund investments can lose value.
- A low NAV does not mean a fund is cheaper. NAV should not be used as the main basis for selecting a fund.
- Past returns are not guaranteed. Historical performance can offer insights but cannot predict future returns.
- SIPs do not guarantee profits. They encourage regular investing and can help manage market fluctuations, but the underlying investment still carries risk.
Mutual Funds are Only Suitable for Experts
Mutual funds are often intimidating for first-time investors who feel they need an advanced grasp of the stock market. Mutual funds are designed precisely to outsource that complexity. However, simply knowing that professionals manage the fund is not enough to make an informed choice.
To transition from dispelling the myth to taking practical action, a beginner should evaluate four core pillars before putting money into any fund:
- Investment Objective
Every mutual fund has a defined mandate whether it is long-term capital growth, regular income generation, or capital preservation. Your first step is to match the fund's objective with your personal financial goals. Ask yourself what you are investing for: a short-term goal like an emergency fund, or a long-term milestone like retirement. - Riskometer
Mandated by regulators, the riskometer visually represents the level of risk associated with a fund, ranging from low to very high. Beginners should evaluate this carefully against their own emotional and financial capacity to withstand market volatility. If a market downturn would cause you to panic and sell, you need a fund lower on the riskometer scale. - Investment Horizon
Your time horizon (the length of time you plan to stay invested) dictates the type of fund you should choose. Equity funds, which carry higher short-term volatility, generally require an investment horizon of at least 5 to 7 years to smooth out market cycles. Short-term goals are better suited for debt or liquid funds. - Costs (Expense Ratio)
Mutual funds charge an annual fee known as the expense ratio to cover management and operational costs. This fee directly impacts your net returns over time. Beginners should compare expense ratios across similar funds, as lower costs mean more of your money stays invested and compounds.
Mutual Funds are Risk-Free Because Professionals Manage Them
Professional fund management does not mean your investment is protected from losses.
Mutual funds invest in market-linked securities, so their value can rise or fall. The level of risk depends on the type of mutual fund and the assets it invests in.
For example, equity mutual funds invest largely in stocks and can see significant price movements. Debt funds invest in fixed-income securities and have a different risk profile, though they are not free from risk either.
Before investing, check the fund's riskometer and understand what type of assets the fund holds. Do not invest simply because a fund has a professional manager.
A Mutual Fund With a Low NAV is Cheaper
Many investors compare the Net Asset Value (NAV) of two mutual funds and assume that the fund with the lower NAV is cheaper.
|
Metric |
Fund A (Low NAV) |
Fund B (High NAV) |
|
Initial NAV |
₹20 per unit |
₹200 per unit |
|
Investment Amount |
₹10,000 |
₹10,000 |
|
Units Purchased |
500 units (10,000 / 20) |
50 units (10,000 / 200) |
|
Portfolio Growth |
+20% |
+20% |
|
Ending NAV |
₹24 per unit (20 x 1.20) |
₹240 per unit (200 x 1.20) |
|
Final Portfolio Value |
₹12,000 (500 x 24) |
₹12,000 (50 x 240) |
|
Total Gain |
₹2,000 |
₹2,000 |
|
Percentage Return |
+20% |
+20% |
Why NAV Doesn't Matter for Returns
As shown above, your total percentage return and actual monetary gain depend entirely on how much money you invest and how the underlying assets perform, not the starting NAV.
- More Units vs Fewer Units:A lower NAV simply means you receive more units for your investment amount, while a higher NAV gives you fewer units.
- Equal Growth:Since both funds hold similar underlying portfolios that grow at the same rate, your ₹10,000 grows to ₹12,000 in both scenarios.
Focusing on NAV when choosing a mutual fund is like buying fruit priced by the piece versus weight; a lower price per individual unit does not mean you are getting a better deal or higher quality.
Past Performance Guarantees Future Returns
While a mutual fund with a strong track record can certainly catch your eye, historical results do not guarantee future performance.
Market conditions are constantly evolving. Shifts in interest rates, economic growth, corporate earnings, government policies, global events, and investor sentiment all directly impact financial markets. For instance, an equity fund that thrives during a bull market may struggle during a downturn. A fund's history offers helpful insight into its past execution, but it should never be the sole driver of an investment decision.
Why Evaluate Across Multiple Market Cycles?
Evaluating a fund across multiple market cycles, spanning both bull and bear phases, reveals how resilient the fund manager's strategy is under varying economic pressures. A fund that only shows stellar returns over the last one or two years might simply be benefiting from a favorable sector tailwind rather than consistent management skill. Looking across full cycles helps you see if a fund can protect capital during downturns as well as capture upside when markets recover.
Instead of chasing peak recent returns, consider:
- Consistency: How steadily has the fund performed year after year?
- Risk profile: How much volatility or drawdown did it experience to achieve those returns?
- Benchmarking: How does it stack up against its benchmark index and peer funds in the same category?
- Investment horizon: Do short-term fluctuations align with your long-term financial goals?
SIPs Always Give Positive Returns
Systematic Investment Plans, or SIPs, are often seen as a simple way to invest regularly. Through an SIP, an investor puts a fixed amount into a mutual fund at regular intervals.
An SIP can help build an investment habit and spread purchases across different market levels. It does not guarantee positive returns.
If the underlying mutual fund performs poorly, the SIP investment can also lose value. The advantage of investing regularly is that you buy more units when prices are lower and fewer units when prices are higher. This can help manage the impact of market fluctuations over time, but it does not eliminate investment risk.
SIPs work best when they are linked to a suitable financial goal and maintained for an appropriate period. Investors should avoid stopping an SIP simply because the market has declined, unless their financial circumstances or investment strategy have changed.
Why Understanding These Myths Matters
Mutual fund investing becomes easier when decisions are based on facts instead of assumptions.
A mutual fund is not automatically safe because it is professionally managed. A low NAV does not mean a fund is cheaper. A strong past return does not promise future performance, and an SIP cannot guarantee profits.
Investors should start with their financial goal. Someone investing for a long-term goal may have a different approach from someone who needs the money in the near future. Risk tolerance, investment horizon, fund category, diversification, and costs should all be considered before making a decision.
It is also important to review investments from time to time rather than checking their value every day. Short-term market movements can create unnecessary anxiety, especially for long-term investors.
Conclusion
Mutual fund investing becomes easier when you separate facts from common misconceptions. Mutual funds carry market risks, and factors such as the fund category, investment horizon, risk level, costs, and financial goals matter more than assumptions about NAV or past returns. A clear understanding of these myths can help you make more informed and realistic investment decisions.
