Mutual Funds are extremely popular amongst investors, but do you know how much of the information that people say about MFs are just myths? Maybe it’s time to set the record straight and get your facts correct.
Mutual Fund SIP is a popular term in investment circles even though there is a certain air of confusion surrounding it. You need to understand that it is not an investment but a method of investment in mutual funds. It is just a strategy that will help you invest better and maybe while trying to apply this method, you should be aware of the myths that surround it.
Myth #1: SIP stands for Small Investors Plan
One of the biggest and easiest myths that surround Mutual Funds SIP is this. Investors think that it is for investing lower sums of money but reality is it is just a very well-organized and long-term investment strategy which does not really gets limited by amount per se. It is essential that one should understand that the money is invested into an underlying asset in a regular disciplined manner.
Myth #2: A Fund with Lower NAV (Net Asset Value) is better
People often misunderstand that the NAV of a mutual fund is similar to market prices of stocks. Many mistakenly buy mutual funds with a low NAV like they buy stocks at cheaper prices. This incorrect view stems from the belief that low NAV values are associated with a potential of increased returns. For example, if you invest Rs. 1000 in two funds, namely A & B, with A having a NAV of Rs 20 and B having a NAV of Rs. 100, then in case of a collective appreciation of 10%, the NAV should also rise by the same amount. So, Fund A’s NAV will be Rs. 22 and Fund B’s NAV will be Rs. 110. Fund B’s NAV is higher than A because it has been around for longer and has seen more appreciation.
Myth #3: Halted Mutual Fund SIP leads to Panelty
Many investors think that if you commit to an investment for a long tenure, you cannot change anything, neither the amount, nor the tenure and doing so will result in penalization. But in reality you can do all that by just giving a written request and you will be able to change the tenure, amount and even the fund type. If you really want to change the fund, you can stop the existing SIP and switch to a new SIP.
Myth #4: SIP is not working (Returns are low!)
People judge their investments by their returns. So, this myth stems from the fact that people look at their absolute returns after short intervals. SIPs are primarily based on Internal Rate of Return or IRR of the investments. In short term the absolute returns obviously stays lower than the IRR because you invest in SIPs from time to time instead of investing at one go. If you want to have good returns, consider investing at regular intervals through a long term period.
Myth #5: Mutual Fund SIPs are only Long Term
Investors get really confused and this seems to be a popular myth that needs to be busted. Mutual Fund SIPs can be enrolled for six months if need be and that is the minimum tenure. But the investments in that tenure need to be long term in nature. Even though the investment time can be short term, the holding time carried out through mutual fund SIP should be long term.
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