Investing in mutual funds has emerged as a smart way to build a corpus for different financial goals such as retirement, wedding, children’s education, and home buying to name a few. But there is also a range of false information or myths about mutual funds out there. Such rumours surrounding mutual funds can discourage people from investing in them.
For instance, many investors believe mutual funds are too complicated or risky, creating an unrealistic perception of this investment avenue. However, it’s important to separate facts from myths when it comes to your finances. Here are five of the most believed myths about mutual funds and the actual facts behind them.
Myth 1: Mutual funds are only for experts
Fact: When you invest in mutual funds, it is the professional fund managers who, based on extensive research and analysis, make all the investment decisions on your behalf. Mutual fund managers have in-depth knowledge of the financial markets and invest the money carefully to help investors get maximum returns. So, even first-time investors with less market knowledge can get started with mutual fund investments.
Myth 2: Mutual funds are ideal for a long-term investment horizon
Fact: Mutual funds can be short-term, medium-term, and long-term depending on your investment objective and financial needs. You can choose liquid funds and several other debt funds to hold funds for a shorter duration. Similarly, you can choose hybrid funds to get exposure to both equity and debt for medium-term goals. If your goals are at least seven years away, you can opt for equity funds. Thus, based on your risk appetite and financial goals, you can choose different kinds of mutual funds with different investment horizons.
Myth 3: Historical returns guarantee future performance
Fact: Mutual fund performance can be affected by several factors, including market conditions, economic trends, and the fund manager’s investment strategy. Therefore, there’s no guarantee that a fund that has done well in the past will continue to perform well in the future. For this reason, it’s important to track and review your mutual fund investments regularly to ensure they are still performing as per your expectations.
Myth 4: More funds, better diversification
Fact: Holding too many funds can actually lead to less diversification, as many of these funds likely overlap in the companies or industries that they invest in. Mutual funds invest across asset classes such as debt, equity, and money market instruments by default, thereby diversifying risks for investors. So, if you add more funds to your portfolio, the chances of duplication and overlap increase.
Moreover, over-diversification can result in difficulties in computing tax on mutual fund investments, minimal risk-adjusted returns, reduced quality, and loss of high-performing assets. So, it is advisable to invest in four or five funds from different categories and diversify your portfolio appropriately.
Myth 5: A demat account is necessary to invest in mutual funds
Fact: It is not mandatory to open a demat account to invest in mutual funds. The only requirement is to comply with the KYC formalities. However, it is entirely up to the investors if they want to hold their investments in a demat account or through traditional mode.
So, there you have it – five common myths about mutual fund investment exposed! Don’t let these misconceptions hold you back from investing in something that could help you to multiply your money and build wealth.