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4 Common Mutual Fund Fallacies that should be busted!

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  | Published: 09 May 2020 | Last Updated On: 20 January 2021

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You may be a novice or a well-experienced person in the world of investment but it does not really matter, since all of you may have come across the common term mutual fund. At one point or another, you may have found yourself struggling with the confusion of whether to put your money in mutual funds or not.

In case you have not begun to invest in mutual funds mostly because of laziness, then we suggest that you start investing now. However, if the reason for not investing in these funds is the myths related to it that you may have come across, then here we are busting these common myths for you.

Without a doubt, mutual funds are amongst the best tools for investors to earn money. However, not many people invest in this investment instrument, probably because they are conservative investors and prefer to put a huge portion of their hard-earned funds in instruments that include lesser risks like fixed deposits, gold, and more.

Usually, mutual funds are discarded as high-risk instruments with as such no assured returns along with it. But such myths may take away the potential to create wealth in the long run from the investors. Here are some of the common myths related to a mutual fund that needs to be busted. 

#1 Top Ranking Funds mean getting Guaranteed Returns

A lot of people think that when they invest in top-ranking funds, they will get guaranteed returns. However, the truth is that investment in mutual funds is dependent on the condition of the market and the risks in it. The return on your portfolio will be based on its performance.

The mutual funds make the investment of their corpus in different financial instruments that may be volatile based on the fluctuations in the market.

This means that the position of your funds can depreciate or appreciate based on the scenario in the market. Therefore, even the top-ranking funds may also not maintain their title in the future and consequently, the returns are also not guaranteed. 

#2 Mutual Fund Investment requires a Large Amount of Money

This myth is common amongst many investors in the market. The fact is that there is no need to have a high amount of income or own a huge amount of money for investing in mutual funds. You can invest in mutual funds even with a small amount of money.

You can make an investment of small amounts periodically- such as weekly, monthly, or quarterly. If you are investing in SIPs, you can make use of a SIP calculator for calculating the returns you can earn on your SIP investments. The calculator will also help you in figuring out the amount you will need for making an investment each month for earning the targeted corpus.

By doing this, you can reach your financial goals only by investing a small amount of money regularly over a duration. The credit goes to the power of dirham-cost averaging and compounding.

Moreover, you also have the option of investing a lump sum amount of money in the mutual fund. 

#3 Lower the Net Asset Value, the Better the Investments

Net Asset Value or NAV in the case of mutual funds is co-related to the net value of the market holdings. This means the market value of the assets of the mutual funds minus its liabilities.

This shows the intrinsic value of a specific fund at a given point in time. The statement that lesser the Net Asset Value is, the better would be the investment is nothing but a myth. Instead, you should be looking at the Net Asset Value deviation over a specific period.

The mutual fund that involves a higher NAV may also offer significant returns in case it performs well in the financial market. 

#4 At the Time of a Market Crash Stop your SIP Investment

Just like in the course of medical treatment, one has to complete it in order to be cured of the disease ailing you entirely, the SIP investment should be continued across its term for achieving the expected results.

SIP investment is a customized investment plan for the long-term. Therefore, you must not stop it even during a market crash. The advisors are suggested that they continue with their Systematic Investment Plans or SIPs without giving much thought to the trends in the market.

If any fund would have been performing well consistently and after doing research you come to a conclusion that it will not be able to sustain, you can withdraw from such a fund and put that investment in a better fund.

There are some kinds of funds that come with a lock-in period. In that case, you will have to wait for the three-year lock-in period for availing the benefits of the tax. 

To Sum Up!

For meeting the growing demands of your lifestyle, you must make enough effort to secure your future. Making an investment in mutual funds will help you in realizing your dreams.

Every investor can enjoy the benefits of a mutual fund, no matter how much experience they hold in the world of investment. Hence, it is important to be wise and begin investing today.