The overall Assets under Management (AUM) figure of the Indian Mutual Fund Industry is fast hurtling towards the 14 lakh crore mark. As a product, Mutual Funds have gained in popularity over the past few years, with the stock markets breaking out in 2012 after a long hiatus. In this article, we aim to debunk five common myths that surround Mutual Fund investing. Read on to know more.
You need to have a high degree of Financial Intelligence to invest in Mutual Funds
Quite on the contrary, Mutual Funds as a product are designed to benefit investors with a lower than average working knowledge of the financial markets. Mutual Funds employ expert teams of analysts and fund managers who work full time to analyze the markets and investment options that fit in with the fund’s overall investment objective. In fact, we’ve often observed that investors with a relatively low degree of financial intelligence tend to fare better than more sophisticated investors, who display the tendency to churn their portfolios more often in an attempts to ‘manage the manager’! This works to their detriment. One doesn’t need to be a market wiz to successfully invest in Mutual Funds. In fact, MFs are ideally suited for those who would not normally invest in the financial markets directly, by offering them an access to skilled fund management capabilities.
It’s better to invest in a fund with a low NAV (Net Asset Value)
This is probably one of the most common myths related to the Mutual Fund industry in India, and the chief contributor to the widespread proliferation of NFOs over the years (which launch themselves at an NAV of Rs 10). Let’s explain this one simply – a low NAV (which results in you buying more units for the same Rupee amount) does not imply that you’ve got more ‘bang for the buck’ or ‘value for money’. What matters is the movement in the underlying securities in the Mutual Fund’s portfolio. The NAV of an Mutual Fund scheme bears no relationship to its performance potential. Investors should focus their analysis on the portfolio of investments held by the scheme and its suitability to their needs", Shastri of Peerless Mutual Fund goes on to say.
For instance, if the underlying portfolio of securities in a fund with an NAV of 10 moves up by 10 per cent, the new NAV will be Rs 11. In the same timeframe, if the underlying portfolio of securities in a fund with an NAV of Rs 200 moves up by 10 per cent, the new NAV will be Rs 220 – resulting in the exact same appreciation in your fund value.
All Mutual Funds are linked to the stock markets
Contrary to the popular belief which equates Mutual Fund Investing with Stock market Investing, all Mutual Funds do not invest in the stock markets. There are mutual funds which invest across the spectrum of bond markets as well. There are a few hundred debt funds which exist in the market, which take zero exposure to the stock markets (and therefore have lower risk and return potential). There are MF schemes for virtually every risk profile. For short term investments and risk averse investors, liquid and other debt funds may offer significantly lower volatility solutions.
Past Returns are indicative of Future Returns
This is quite possibly the greatest myth (or trap!) of all. It’s a myth that just because a mutual fund scheme has returned 100 per cent in the past calendar year, the trend will continue. There are occasions when a specific stock pick becomes a ‘multibagger’ and hence inflates the performance of a scheme over shorter timeframes. This is no reason for you to invest in that particular fund. On the contrary – what goes up in the stock markets also comes down. The markets are great leveler! Approach mutual funds which have shown a sudden appreciation in their NAV with an element of caution. Choose mutual funds that have shown long term growth track records (7 to 10 years) and performed across market cycles.