5 Common Myths About Mutual Funds You Should Know

Mutual funds are a well-established investment tool, but they are often misunderstood. Misconceptions surrounding mutual funds can lead to poor investment decisions. It is important to understand the facts before diving into mutual fund investments. By clearing up these myths, you can make smarter choices and confidently grow your wealth. Check out this breakdown of the five most common myths about mutual funds to help you stay informed.

Myth 1: Bigger Funds Mean Bigger Returns

Many investors think that a mutual fund's size directly impacts its performance. They believe that bigger funds offer higher returns and lower risks.

Reality

The size of a mutual fund has no direct correlation with its returns or the level of risk involved. Bigger does not always mean better. Large funds may offer the same risk-adjusted returns as smaller ones; in some cases, smaller funds can outperform larger ones. A fund's performance depends on its portfolio and the fund manager's expertise. When managing a larger fund, the manager often has to diversify the portfolio to accommodate more assets, which can sometimes lower the overall quality of the investment. When you invest in mutual funds, it’s essential to evaluate factors such as the fund's historical performance, the strategy behind the fund, and the team managing it.

Myth 2: Daily Trading Equals Quick Profits

Another popular misconception is that quick profits can be generated by trading frequently or investing in the stock market daily.

Reality

Stock market trading, especially daily, is highly speculative and requires a deep understanding of the market. Timing the market consistently is something even seasoned professionals struggle with. Without significant research and market insight, most individual investors who attempt daily trading may end up with losses instead of profits. Mutual funds are not designed for daily trading or speculation. Instead, they are a tool for long-term wealth creation. Fund managers use well-researched strategies to pick stocks and bonds expected to perform well over time, making mutual funds a safer option for investors looking to grow their money steadily. If you’re new to investing, focusing on long-term goals is better than trying to beat the market daily. By staying invested longer, you’re more likely to benefit from market growth, allowing your investments to compound and grow at a healthier rate.

Myth 3: You Need a Lot of Money to Start

Some potential investors shy away from mutual funds because they believe they need a lot of money to begin.

Reality

Contrary to popular belief, you don’t need significant money to start investing in mutual funds. In fact, you can start with as little as Rs. 500. This is particularly useful for investors who want to adopt a disciplined approach to investing but don’t have large sums to invest at once. Many mutual funds offer the option to invest through a Systematic Investment Plan (SIP), which allows you to invest a fixed amount at regular intervals, such as monthly or quarterly. You can start small and gradually increase your contributions as your financial situation improves. A SIP calculator can help you estimate how much your small investments can grow over time, giving you a clear picture of potential returns based on your contributions. 

Myth 4: A Low NAV is Better

Many investors mistakenly believe that a mutual fund with a lower Net Asset Value (NAV) is a better investment than a fund with a higher NAV.

Reality

NAV is simply the price per unit of the mutual fund, and it doesn’t indicate the quality or future performance of the fund. Whether you buy units at a higher or lower NAV, the amount you invest and the percentage growth of the fund will determine your returns, not the NAV itself.

For example, if you invest Rs. 5,000 in two different funds, one with a lower NAV and the other with a higher NAV, your returns will depend on the fund’s performance, not the price per unit. Both investments will grow by the same percentage, assuming both funds have similar portfolios. What truly matters is the composition of the fund’s portfolio and how well the stocks and bonds within that portfolio perform over time. The NAV doesn’t affect the growth potential or risk of the investment. Focus on the portfolio's quality and the fund manager's track record, not the NAV, when making investment decisions.

Myth 5: Liquid Funds are Risk-Free

Liquid funds are often seen as a safe haven for investors who don’t want to take on the risks associated with equity funds.

Reality

While liquid funds are considered less risky than equity or long-term debt funds, they are not entirely risk-free. Liquid funds invest in short-term debt instruments, which are generally more stable but can still be affected by changes in the market. For instance, during periods of market instability, such as currency fluctuations or sudden economic downturns, liquid funds can experience temporary losses. Although these events are rare and short-lived, it’s important to remember that no investment is entirely risk-free. 

Conclusion

Understanding the facts behind these common mutual fund myths is crucial for making informed investment decisions. By staying clear of these misconceptions, you can maximise the potential of your mutual fund investments. Tools like a SIP calculator can help you make better financial decisions and plan your investments wisely. Whether investing a small amount or managing a large portfolio, focusing on long-term goals and avoiding common myths will help you achieve better financial outcomes.