Debunking the most common myths about mutual funds

• Follow

The word mutual fund has always been teamed up with the concept of rocket science, which people keep running away from. Some even think of it as a kind of charity collection centers philosophy, where we keep saying, “paise nahi hai” (keep moving we have no money). Now blaming people with no knowledge is always useless, as many aren’t aware that mutual fund is the shrewdest way to long-term investment as well as wealth creation. Even then less than 2% of the Indian population invests in mutual funds, and much of the credit goes to the following myths, which needed some bursting.

Opening of a Demat Account: The myth buster here is, that there is absolutely no need to open a Demat account to invest in mutual funds. Demat account is essential when actual stocks or shares are to be purchased. To invest in mutual funds, a mere KYC and a bank mandate is sufficient for the creation of a portfolio.

Mutual fund equals to high risk: This myth comes from the apprehension saying mutual fund relies heavily on the equity market and an investor may end up losing all the money if the market crashes. Bifurcating this myth in two parts, first, mutual funds do not invests only in the equity market, but also target debentures, bonds, government securities, commodities like gold, etc. This provides investors with the option to create a portfolio even by investing a small amount. Second, equity-based mutual funds are although risk driven, in case of market vulnerability, and depending upon the scheme of the mutual fund, the fund manager switches the fund to protect the investment.

Mutual fund requires a lot of money: In fact, a mutual fund is the only avenue where you get to invest in the costliest scrip or unit by investing as little as Rs 100. Mutual fund schemes club resources of different investors and invests in equity, debt, money market, or other markets to earn profits. These profits are after deduction of the fund manager’s fees and other expenses distributed amongst the investors.

-Mutual funds are risk-free: In here the bitter truth is that any mutual fund possesses a certain amount of risk, depending upon the instruments the fund invests in. Therefore mutual funds which invest in equity possess higher risk compared to funds that invest in debt or government securities. Hence it is advisable to invest in funds according to needs and risk-taking capacities.

-All mutual funds investments qualify for income tax deductions: Sometimes an investor merely invests in mutual funds, assuming it can provide basic tax relief, however, only equity-linked savings scheme (ELSS) funds, provide tax relief under section 80C of the income tax act up to Rs 1.5 lakh per financial year. This tax relief further comes with a three-year lock-in period where investors cannot liquidate the fund amount. Therefore not all funds qualify for tax relief, and in order to avail of this relief, it is necessary to undergo the lock-in phase.

-Only an expert can be a mutual fund investor: Yes, it is necessary to do some research before you invest in any mutual fund, however, you need not avail a Ph.D. for the same. With the internet, television, and governmental promotions, investing in mutual funds is much easier. Above that, there are financial advisors to help you clear your doubts.

-Mutual fund equal to long term: As said earlier, mutual funds that invest heavily in shares of companies, need time to grow. Whereas funds that invest in debt or money market instruments do not need much time to grow, albeit their returns are lower. Liquid fund is another example where long-term investment is futile. Therefore depending on the needs and risk-taking capacities, numerous funds are available.

Investment in a mutual fund is and has always been a good bet, so, ignore the myths and explore the options yourself and fulfill your dreams.

(The writer is the founder of Money Mantra. Views expressed are personal)