Debunking 5 Mutual Fund Myths To Help You Grow Your Money

Mutual funds are probably one of the most misunderstood investment avenues in our country, aren't they? Despite having repeatedly shown their potential to outperform a lot of sub-optimal investment instruments like bank FDs, PPFs etc, a big chunk of people still prefers to stay away from mutual funds.

The reason? Well, failure to understand mutual funds remains a key reason why many people, including not only the older generation but even the millennials, have failed to unlock the massive potential of mutual funds.

If you too fall into that category, then it's time for you to hit the refresh button in your mind and debunk these myths surrounding mutual funds which are probably preventing you from growing your money!

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1. Mutual fund selection should be based on NAVs

Many existing or potential mutual fund investors commit this mistake of perceiving that a lower NAV implies that the fund is better. They think so probably because a lower NAV makes that fund seem cheaper vs the fund priced at a higher NAV. This is where we go wrong! Simply put, NAV is just the per-unit price of a fund, which depends upon the asset under management and the total outstanding units.

For example, if you invest Rs 10,000 each in two funds having NAV of Rs 20 (fund A) and Rs 50 (fund B) respectively, the different NAVs only imply that you end up holding 500 units of A and 200 units of B, with the total value of both being same, i.e. Rs.10,000.

So, whether a fundĄ¯s NAV is high or low, it would only change the number of units the investor owns and is never an indicator of the fundĄ¯s status or performance. So, do not blindly the myth that a higher or lower NAV indicates the fund's performance or track record.

In fact, while evaluating a mutual fund, look at the portfolio and returns of the fund over various time periods like 6 months, 1 year, 3 years, 5 years etc, and compare it to the benchmark indices and peer funds. And again, remember that the value of the NAV should be immaterial to the decision of choosing a fund.

2. Past performance guarantees future returns

More often than not, many investors commonly believe that past performance is the best judge to compare and select funds to invest in. And this myth is what leads them towards selecting unsuitable funds which go on to underperform and even result in losses!

So, keep in mind that past performance is neither an indicator of future performance nor does it guarantee it. It's just a reflection of how the fund performed in the past across different time periods.

So, while it's okay to have a look at the past performance to get a fair idea of how the fund performed during various market cycles and time periods, your ultimate decision to choose a fund should be by comparing it with the benchmark indices and peer funds.

For the uninitiated, benchmark indices act as reference points to adjudge the performance (in terms of returns) of a particular fund. They are helpful in making the investor decide whether to make fresh investments, stay invested or redeem the selected mutual fund.

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3. Dividends are a form of windfall income

This myth is no less harmful.

Mutual fund investors tend to consider dividends as some form of a windfall income and hence are happy to choose the dividend option instead of growth when selecting a fund. Even some mutual fund distributors also tend to take advantage of this myth by pushing mutual fund schemes that have just declared dividends, and tempting investors towards them.

However, what you as an investor must understand is that the dividend declared is paid out of the fundĄ¯s own AUM (assets under management), which means it's out of you, the investorsĄ¯ own money! That is why the NAV of a fund, too, gets reduced by the dividend amount after declaration.

Moreover, even this dividend is usually calculated on the basis of the face value of the fund, not on its NAV. For example, if a fund with NAV of Rs.50 declares 50% dividend, the dividend amount will not be Rs 25 (50% of NAV of Rs 50), but it will rather be Rs 5 (i.e. 50% of Face value, assuming it as Rs 10 here). So, the NAV will go down to Rs 45 after the dividend declaration.

4. SIPs should be stopped when the market bleeds

We all know that volatility is an inherent characteristic of the stock market, especially the equities. Most people love it when the market goes up and on the other hand, feel dreadful and end up panicking when the market falls and their portfolio bleeds. They tend to believe the myth that you should redeem your investments when the market bleeds, and stop your ongoing SIPs if any.

In fact, you have to do the opposite!

Investors should instead 'buy the dips' and also continue with their SIPs during bearish market conditions like market corrections or even crashes.

Wondering why? Click here to know more.

5. FundĄ¯s investment objectives are none of my business

Mutual funds clearly state their investment objectives, investment mandate as well as asset allocation strategy in their various investor communication materials. This is as per guidelines of market regulators too. The communication materials generally include product leaflets, e-mailers, fact sheet, scheme information document (SID), etc.

But a lot of investors tend to believe that such information regarding the fund is none of their business, and hence they don't pay attention to it. That's where they go wrong!

With the help of such mutual fund scheme-related information, you as an investor can in fact figure out whether a certain fund is compatible with your risk appetite, financial goals and investment horizon, or not. Ignoring such information can at worst leave you with the wrong fund selection which can unstabilize your finances if it's not as per your risk appetite, and even fail to let you achieve your set financial goals on time.

Even if you didn't pay attention to this information earlier during the selection of funds, better late than never! Check whether the investment objectives of the fund/scheme are aligned to your financial profile, and then decide to continue with it to grow your money or redeem it and switch to some other better scheme.

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