DEMYSTIFYING MYTHS ABOUT MUTUAL FUNDS

Mutual Funds | Published on Feb 25th 2016 | Comment(s) 0
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Most people find it difficult to understand the term mutual fund, and consider it as a financial jargon. However, Mutual Funds (MFs) are nothing but money pooled in by a large number of investors for investing in securities such as stocks, bonds, gold and similar assets to achieve certain financial goals.

Let us today become friends with mutual fund investment and understand it by busting some common myths.

  • MYTH: Mutual Funds can be purchased only from a certified advisor and you must hold a DEMAT account

There are a variety of ways through which you can invest in MFs. Look for some certified advisors, brokerage houses and banks that give financial guidance. Historic performances are also helpful and can be analyzed by comparing fund performance with benchmark indices like Sensex. The only benefit with Demat is that you can merge the Mutual Fund holdings along with other holdings in the same account.

  • MYTH: Mutual Funds are invested only in stock market

Individuals usually relate Mutual Funds with Equity Funds, but this is not true. Mutual funds can be open ended, close ended or interval based depending on the withdrawal period, and in India, consumers tend to choose different products such as Equity mutual funds, Equity linked savings scheme (ELSS), Debt Mutual Funds and Regular income funds depending on their financial and personal goals.

  • MYTH: Mutual funds are only for long term investors

Long term investments have higher scope for profits but there exist many schemes that give flexibility. You can go for debt mutual funds if you are targeting a period of less than 5 years which is better than bank’s Fixed Deposits (FD). Equity mutual funds are the most suitable ones for long-term. Also, within the debt you may wish to invest in Money Market Instruments that mature in a single day to those that mature in one or even ten years.

  • MYTH: Mutual Funds have low returns and there is no assurance

An equity mutual fund reflects the overall economic performance and provides strong returns when the economy is in good health and debt funds can in fact be a source of regular returns just like the FDs.

In a healthy economy, the returns of mutual funds generally range from 10%-30% per annum over a time horizon of 1-5 years. The returns vary depending upon the share of equity, debt and government securities into the mutual fund investment portfolio.

  • MYTH: Money gets locked by investing in mutual funds

Until and unless you are investing in close-ended funds your money will never get tied up in Mutual Funds. Also there is complete freedom to enter and exit if you are investing in an open-ended scheme. There are many types of mutual funds to choose from in the market such as:  

Based on Maturity period

  • An open-ended fund is a fund that is available for subscription and can be redeemed on a continuous basis.
  • A close-ended fund is a fund that has a defined maturity period, e.g. 3-6 years.
  • Interval funds combine the features of open-ended and close-ended funds.

Based on investment objectives

  • Equity/Growth Funds invest a major part of its corpus in stocks and the investment objective of these funds is long-term capital growth.
  • Debt/Income Funds generally invest in securities such as bonds, corporate debentures, government securities (gilts) and money market instruments.
  • Balanced Funds: Balanced funds invest in both equities and fixed income instruments in line with the pre-determined investment objective of the scheme. 

Other Schemes

  • Equity linked Savings Schemes: These are growth-oriented tax-saving schemes that offer tax rebates to investors under specific provisions of the Income Tax Act, 1961.
  • Index Funds: Index schemes replicate the performance of a particular index such as the BSE Sensex or the S&P CNX Nifty.
  • Sector Specific Funds: Sector-specific funds invest in the securities of only those sectors or industries as specified in the Scheme Information Document.

 

  • MYTH: Large amount is needed for investing in Mutual Funds

This is a long standing myth that absolutely does not hold true in present context. Most of the funds allow an investment as low as Rs. 1000 and that too with no maximum limit. Even for ELSS the amount is as low as Rs. 500 and even if you don’t transact further there are no monthly or annual charges associated.

Do not blindly follow any information as it may turn out to be a myth which may stop you from earning a sizeable income through mutual funds. Avail expert opinion if you want to know more about mutual funds and how they can help you meet your financial goals.




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