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Sunday, June 21, 2015

13 Mutual Fund Myths Busted

The moment we talk about Mutual Funds, what are the first thoughts that come to your mind? If it is risk, market, stocks, unsafe, low growth or anything that does not generate a positive momentum, then probably you are one of the billions who would love to burst some of your mutual fund myths...read on...


Here are the top 13 myths surrounding investments in mutual funds. Get them busted one by one.

1) Mutual Funds are only for those who love to invest in stock market
Mutual Funds in all types of markets including stock markets. They also invest in debt and money markets, Government securities commodities like Gold, Corporate bonds etc. The biggest benefit is that the investments are managed by professional fund managers backed up by a team of analysts.

2) It is beneficial to invest in schemes with low NAVs
Just like the price of a stock gives you no idea of its intrinsic value, the NAV does not give you any idea of the value of the fund. It really does not matter whether NAV is high or low at the time of investing, what matters is actually your returns on investment. Rather than NAV, better consider other factors like past performance, expense ratio, fund management etc.

3) You need to time MF investments
You are absolutely advised NOT to time the market, and especially if you are dealing with mutual funds via SIPs. An SIP ensures discipline, thus averaging out your cost over time.

4) Performance of a fund is directly proportional to the stock market performance
An equity MF invests in 30-40 funds and it may partially reflect or may not reflect at all any correlation with the stock market movement. It all depends on the selected stocks in the specific mutual funds, and when they were bought or sold by the fund manager.

5) Debt Mutual Funds are also impacted by equity market movement
Debt Funds do not invest in equity and are therefore generally not impacted by stock market movements.

6) Mutual Fund investments are for youngsters
Every fund is different. Different funds cater to different risk taking appetite and hence different age groups. e.g. a person with 50+ years of age should go for a balanced fund while a person with 20+ years of age should go for a growth equity fund

7) You get tracked by tax authorities by investing in Mutual Funds
Purchase of funds of more than Rs. 2 Lacs are reported in the Annual Information Report, and not every transaction. That way, you are tracked everywhere now a days through your PAN Number. In any case, if you are paying your taxes on time, why should you be worried about being tracked.

8) Mutual Fund investments cannot be pledged as security
Investors can pledge their units as security to banks and financial institutions, thus enabling you to borrow loans against the pledged amount.

9) It is difficult to track all your Mutual Fund transactions
The solution lies in getting the Consolidated Accounts Statement (CAS), which is a single account statement for all your mutual fund transactions across all fund houses. PAN is your common thread which brings all your transactions together on this single statement. You receive this statement every month.

10) Investing in a high performing fund is a guarantee for success
There is never a guarantee of future based on past performance. You must regularly monitor the fund performance and take appropriate steps if you are convinced of inadequate growth in future.

11) Sell Mutual Funds when the markets are at a high
Firstly, you will not know when the markets have reached a high. Secondly, even if you know it, you must understand what you plan to do with the withdrawn money. Thirdly, when you go via SIP investments for long term, then you never try to time the market - either during buying or during selling

12) Mutual Funds are taxed as any other instruments
Equity and Debt based Mutual Funds are taxed differently. Any gains for investment periods above 1 year in equity funds and above 3 years in debt funds is considered as a long term capital gains. Long Term Capital Gains for equity based Mutual Funds attracts zero tax and for debt based mutual funds attract 20% tax after inflation adjustment. 

13) Bank FDs are better and safer than Debt Mutual Funds
Not only Bank FDs are highly tax inefficient, the returns are also lower than debt based mutual funds. As the economy matures, the debt mutual funds would remain the only viable option.

Mutual Funds are one of the safest and most reliable investment tools to generate huge wealth in the long run. Go on, get started if you have not yet done so.

Cheers

Manoj Arora
Freedom can buy you.... what money cannot !!

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