Mutual fund, as we all know, is a large pool of money collected from investors who like to save money and receive good returns. Your investment in mutual fund is managed professionally by fund managers who use the money to build a well planned portfolio consisting of stocks, bonds and other financial instruments. As an investor, you own the shares of mutual fund investment but do not gain the ownership of individual securities. With mutual fund, you can invest in small or large amounts as per your ability and get the benefits from being involved in a large investment pool built by other people. Any gains and losses get shared equally by all the investors in proportion to their investment amount. However, people carry a lot of myths with regards to mutual fund investment, the details of which are explained below.
Requirement of large sum for mutual fund investment
People often carry a misconception that they require a large sum of money to invest in mutual funds. But, the truth is that you can start with an amount as low as 500 while investing in equity linked saving schemes (ELSS) or Rs 1,000 each month with systematic investment plan (SIP), a popular type mutual fund investment.
Purchasing a top-rated MF scheme gives better returns
As rating of mutual funds varies upon the performance of the fund over a period of time, it is not necessary that the top-rated fund of today will maintain its rating a year or two down the line. Top-rated funds can be seen as a good option to invest in at the beginning, but the better returns are not guaranteed. So, one must keep a track of mutual fund investments with respect to its set standards to make a proper evaluation of the performance. Doing the same will put you in a good position to decide whether it is worthwhile investing in such funds or make an exit from the same.
Better to have fund with lower NAV
You must dispel the misconception that runs deep into the investor, saying a fund with lower NAV is better. NAV of the mutual fund shows the market value of all its securities. Capital appreciation will depend upon the price movement of its underlying securities. For instance, on investment of Rs 20,000 in both fund A and B with NAV of Rs 40 and Rs 100, respectively, will fetch you 500 units of fund A and 200 units of fund B. What will happen to the NAVs of both the schemes if they invest their entire capital in same proportion across same stocks, which appreciate by 10%? The answer is the NAVs of the said schemes will also rise by 10% to Rs 44 and Rs 110, respectively. The value of your investment will rise to Rs 22,000. So, you must keep in mind that the existing NAV of a fund does not affect the returns.
Mutual fund investment same as stock market
Don’t run the misconception that mutual funds invest only in stocks as the most diversified equity funds have a proportion of equity and debt. With the availability of a large number of mutual funds with varied degree of risk from low to high, there are funds that can suit the needs of each investor.
Demat account vital for mutual fund investment
Don’t carry the myth that you require a demat account to invest in mutual funds. All you need here is to just fill up an application form, attach a cheque of a certain amount and submit the same at the mutual fund office or your financial adviser.