6 Mutual Fund Investment Myths You Should Watch Out For

The AMFI has done some great work of late to promote awareness about Mutual Fund Investments among the masses, with their catchy “Mutual Funds Sahi Hai” campaign. And yet, with the Mutual Fund industry’s assets zooming past the 23-lakh crore mark across nearly six and a half crore folios, it’s a surprise that so many investors steadfastly continue to harbor these misconceptions about Mutual Fund investments!

NFO’s are Better Than Ongoing Mutual Funds

Driven by the fallacious assumption that ‘low NAV is cheap’, and ‘more units is better’, many investors still continue deploying their hard earned moneys into NFO’s or New Fund Offerings. However, NFO’s generally tend to underperform Mutual Fund schemes with long term track records of outperformance across market cycles.

Debt Funds are Just Like Fixed Deposits

The recent fall in debt fund returns has served as a stinging reminder to first time investors that debt funds are, in fact, not like fixed deposits. The prices of the bonds held by debt mutual funds are marked to market daily, and therefore subject to numerous local and global factors that could bring down their returns.

You Cannot Lose Money in Mutual Fund SIP’s

The recent proliferation of Mutual Fund SIP’s suggests that many investors are starting them while turning a blind eye to their associated risks. Your equity mutual fund SIP’s can, in fact, go into flat or negative territory for extended periods of time. Only your ability to resolutely continue with your monthly tranches even when the chips are down, will determine whether you earn long term returns from them or not.

Direct Plans will Earn you Better Long-Term Returns

Direct Plans have found their fair share of takers recently. While it’s a fact that Direct Plans will perform marginally better than regular plans in terms of NAV growth, it also rings true that investing in an unadvised manner may well rob you of that outperformance, and then some. Without the support of an Advisor, you may end up investing in poor performing funds and succumb to numerous behavioral traps, severely affecting the long term returns from your Mutual Fund Investments in the process.

GILT Funds are Low Risk

Many fixed income investors perceive GILT funds as low risk, simply because they invest into government bonds that have a sovereign backing. In doing so, they discount the fact that longer duration government bonds are heavily exposed to interest rate risk, or the risk of their prices falling in sync with rising yields. A case in point is the past one year, during which period the category average returns from long term GILT funds have been just about 1%!

Mutual Fund Dividends are Guaranteed

Unlike interest payouts from Fixed Deposits, Mutual Fund Investments do not guarantee dividends. The fund’s performance will determine both the quantum and the frequency of your Mutual Fund dividends – which, in turn, will hinge quite heavily upon market conditions. Equity Mutual Fund dividends tend to be a lot more volatile than those from Debt Oriented ones.