Mutual funds are rising in popularity as an instrument of investment. However, some myths regarding mutual funds still persist in the market. Here are the top five myths debunked.
- All mutual funds are equity-linked saving schemes
There are different kinds of mutual funds. Some are equity mutual funds, some are debt mutual funds, some are balanced mutual funds (a mix of debt and equity), and some are gold-linked mutual funds. Debt funds are those where the majority of the fund’s assets are invested in debt securities such as treasury bills, commercial paper, corporate bonds, and so on. Debt funds are less risky than equity-linked mutual funds due to their higher exposure to government securities and highly rated corporate debt.
- Mutual funds can be bought only from a certified advisor.
You can invest in mutual funds in three ways; via banks, brokerage houses, or financial advisors. You don’t need a demat account to invest in mutual funds. You could either just fill the form of the specific mutual fund, or invest online via the brokerage house or the fund’s website.
- The mutual fund with the lower NAV is better than the one with the higher NAV.
The NAV of any mutual fund is dependent on the amount of money invested in the fund, the profits made by the fund and so on. An equity-linked saving scheme might have a high NAV simply because it has been around longer as compared to a another equity mutual fund, and has a much larger assets under management figure than the comparatively newer fund.
- Mutual funds with the highest rating are always the best.
While mutual fund ratings are one important way in which to rank mutual funds, they are not the only criteria to be used. This is so because mutual fund ratings are based on prior performance, and the future returns of the mutual fund may differ from the prior performance due to a variety of factors. While trying to decide, one should also look at the sectors in which the mutual fund is investing, the general performance of the fund house and the opinions expressed by the fund manager.
- Mutual funds are only for the long-term.
There are many mutual funds which invest in very short-term instruments such as 91-day treasury bills and so on. These can be an alternative to fixed deposits. Equity-linked saving schemes are a more long-term investment.