Myths about Mutual Funds Bursted

05 Sep 2019

I will try to bust some of the myths about Mutual Fund investing which will help a common investor understand this concept better.

HERE ARE SOME KEY THINGS WHICH YOU SHOULD KNOW-

1. Both Dividend and Growth option scheme of a Mutual Fund is same- MF is like a Pizza which you can cut either in 4 slices or 8 slices, but you will get the same quantity to eat. So, if a scheme is paying dividend your NAV will come down with that amount. Therefore, NAVs of dividend paying scheme are generally lower than growth scheme but the returns are similar.

2. NAV is just a number and never look at it while investing- Many people invest in NFOs and Mutual Funds (MFs) having lower NAVs, thinking that lower NAVs will translate to higher returns. This is the biggest myth. Mutual Fund returns are always measured in percentages and therefore absolute numbers like NAVs doesn’t matter. NAV is not like a stock price. It is just a number which facilitates allotment of units and calculation of returns.

Fund A having NAV of Rs. 10 is not cheaper than Fund B having NAV of Rs. 100. If the market has given 20% returns , then the NAVs of both the funds will increase in tandem with market. (There may be slight difference in their returns due to fund expenses, agent commission, etc.)

3. Mutual Funds do offer consistent risk free returns- Many investors are not aware that there are different MFs schemes that invest in liquid and debt funds like government bonds. So, investors can expect a risk free consistent returns of 7–8% annually. See the chart below that shows that liquid funds have given more than 7% every year.

4. Mutual Funds help in savings taxes- There are special MF schemes like Equity Linked Saving Schemes (ELSS) specially created with a lock-in for 3 years with which investors can saves taxes. All the investment in the ELSS schemes can be claimed as tax deduction under Section 80C. The biggest benefit of ELSS is that the lock-in is only 3 years compared to any other tax saving scheme and the returns are handsome. Check out the returns of last 3 years of ELSS schemes below:-

5. Investment in Mutual Fund should only be done in Direct Mode and not Regular mode- There are many platforms online that allow you to invest in direct schemes of mutual funds (that is sold directly by mutual fund company without any agent commission built in) and are highly convenient. You simply need your PAN and Aadhar to open the account and start investing.

To get in touch please visit us at investocafe.com



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