5 misconceptions about mutual funds that can mislead you and your investments

“Mutual fund investments are the same as investing in equities”, “Investing in mutual funds for beginners is highly risky for first-time investors” – you might have heard such myths often in your journey as an investor. This article busts five popular misconceptions regarding mutual fund investments for beginners. Read about these mutual fund myths and avoid buying into them!

1. Mutual funds are not suitable for beginners

One of the many mutual fund myths that keep beginners from investing in mutual funds is the misconception that mutual funds are bad for beginners. First-time investors want their investments to be less risky and stable. Not only can blue chip investments offer lesser risk and stability, but also the additional advantage of a dedicated fund manager’s expertise. These factors make investing in mutual funds for beginners a suitable option. 

2. Investing in mutual funds requires an enormous investment corpus

Contrary to popular opinion, a beginner does not require a large corpus to make a mutual fund investment. In fact, you can start a mutual fund investment with an amount as low as Rs. 500 per month through a Systematic Investment Plan (SIP). You can also gradually increase your SIP amount over time. The flexible nature of mutual funds proves that this opinion too is a misconception.

3. The most important criterion for selecting a mutual fund is the NAV

In most people’s eyes, higher NAV (net asset value) is bad while lower NAV is good. A mutual fund’s NAV represents the fund’s market value per unit but is not representative of the fund’s ability to generate returns. Let us understand this with an example. Let us say you purchase 1000 units of Fund A with an NAV of Rs.10 and 100 units of Fund B with an NAV of Rs.100.

Two years later, since both funds belong to the same portfolio, they grow at 20% equally. The NAV of Fund A would be 12 and the NAV of Fund B would be Rs.120. Your returns would be the same in both the cases. 

4. Mutual funds are high-risk investments

Another mutual fund myth concerns the risk factor involved in mutual fund investments. All mutual funds are not high-risk investments. Low-risk mutual funds such as debt funds offer a secure investment option to beginners who do not wish to take a higher risk. Hybrid funds are a middle ground between equity and debt funds where risk is concerned. You must diversify your mutual fund investments and reassess your investment portfolio annually to reduce your portfolio’s overall risk. 

5. You need a Demat account to invest in mutual funds

That opening a mutual fund requires a beginner to have a demat account is another popular mutual fund myth. It is not mandatory for investors to have a demat account to invest in an equity fund or balanced fund in India. All you need to submit to the Asset Management Company (AMC) as an investor is a Know Your Client (KYC) form along with the required documents. Post the verification of these documents, your investment will be accepted by the AMC. You can invest through the AMC website or app, through online aggregators or through the physical route depending on your preference. 

Besides refraining from subscribing to misconceptions such as these, you must always keep your financial goal in mind while investing in mutual funds.