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Sunday, May 11, 2014

10 most common Mutual Fund Myths

Mutual Funds are just the right solution for investors ready to take reasonable risk and do not have time to analyse and dissect organisation data. Each one of us will probably touch Mutual Funds at some point of our financial investment cycle. Here are the 10 most common myths surrounding Mutual Funds that you must be aware of .. read on...

Myth 1. Mutual Fund investments are only for those who want to invest in Stock Markets

Fact 1. MF investments are investment vehicles which are not confined to stock markets alone. MFs also invest in money market and debt market instruments like Corporate Deposits, Treasury Bonds, Govt Securities etc. The prime benefit of MFs is a professionally managed portfolio against payment of fund management charges.

Myth 2. One should time MF investments

Fact 2. Investors are advised not to time the MF investments, just like they don't need to time the stock markets. Rather, they should spend time in the market. Instead of timing the market, investors are advised to use SIP (Systematic Investment Plans), STPs (Systematic Transfer Plans) and SWPs (Systematic Withdrawal Plans) to maximise their yields on Mutual Fund returns

Myth 3. Performance of Mutual Funds is directly related to Stock Market performance

Fact 3. An equity MF scheme typically invests in 30-40 stocks across various sectors and industries, depending on the purpose of the fund. Fund managers always strive to beat the benchmark index to attract more investments in their fund. Also, they have the flexibility to move the funds to debt and cash and vice versa to prevent losses or enhance gains for their funds.

Myth 4. Debts Funds are also impacted by equity market movement

Fact 4. Debt funds generally do not invest in equity and are rarely impacted by stock market movements. Instead, they invest in money market and debt instruments like treasury bills, Government securities, Corporate Bonds, Debentures, etc which provide relatively low risk low reward returns.

Myth 5. Mutual Fund investments cannot be pledged as security

Fact 5. MF securities can be pledged as a security to financiers such as banks and financial institutions to borrow money. 

Myth 6. Tax on MF investments are the same as in stocks

Fact 6. Returns on MF investments are considered as Capital Gains and taxed as short term (less than 1 year) or long term (1 year or more). Long term Capital Gains on equity MFs is nil and for debt mutual funds is 10% (without indexation) or 20% (with indexation). Short Term Capital Gains tax on equity MFs is 15% and for debt mutual funds is taxed as per your tax slab.

Myth 7. Bank FDs are better and safer than Debt Funds

Fact 7. People having low risk appetite feel that it is better to go for FDs as these are considered safe. Debt funds carry no more risk than Fixed Deposits, though they have some charges associated with them. However, Debt Funds have emerged as a good investment avenue for risk averse investors as they are very tax efficient and provide handsome post tax returns.

Myth 8. Buying a top rated MF scheme ensures better returns

Fact 8. Mutual Funds ratings are based on their past performance and gives the investor an idea of the consistency of the MF returns. They are more a reflection of the skill and expertise of the fund manager(s) than the fund itself. But this does not guarantee anything for the future. The Fund manager can go wrong anytime or he may move away from the fund he was managing till date. 

Myth 9. To diversify across equity and debt, one needs to buy different funds

Fact 9. There is no need to invest separately for debt and equity. One may invest in balanced mutual fund schemes. A balanced mutual fund invests in both equity and debt funds. So the equity-debt could be split 60:40 or 50:50 or other ratios, thus providing you the required flexibility in a single fund.

Myth 10. It is difficult to track your investments

Fact 10. The fund house is obligated to send an allotment confirmation to the units holder by email and SMS within 5 business days of the investment. If one has invested in multiple fund houses, then the solution is to get the Consolidated Accounts Statement (CAS). CAS statements are sent once a month if there have been transactions during the month and at least once in 6 months even if there has been no new transactions.

Happy investing !!