7 Common Mutual Fund Misconceptions

Tags: Wealth Management, Investment Lesson, Mutual Funds, Stock market, Budget, Finance, Investing, Personal Finance, Investment

Whether you are new to mutual fund investments or considering adding a mutual fund SIP investment to your existing portfolio, redundant myths can hinder confident decision-making. The truth is that mutual funds offer a convenient and professionally managed avenue for your wealth to grow over the long term. Yet, the myths - from thinking you need huge sums to start, to believing mutual funds are inherently unsafe – may cause people to miss out on the potential benefits these investment avenues have to offer.

Let us look at some of the common mutual fund myths.

1. “Investing in Mutual Funds Requires a Lot of Money”

One of the widely believed myths is that you require a ton of money to start investing in mutual funds. Contrary to this logic, however, certain mutual fund schemes do offer the capacity to start small - sometimes as low as Rs. 100 or 500 per month in an SIP (Systematic Investment Plan). This amount varies with schemes and asset management companies, so you need to check the Scheme Information Document for details. These small, regular contributions can fit any budget, making it beginner friendly to build an investment habit. Also, the power of compounding gives even a small amount of money the potential to grow exponentially when invested over many years. Hence, it’s a misconception that only wealthy or advanced investors benefit from mutual funds. With a mutual fund SIP investment, you can gradually increase your corpus without spending more than what you can manage.

2. “Mutual Funds Are Just Like Stocks, Equally Risky”

Yet another incorrect idea is to equate mutual funds with direct equity - assuming the same degree of risk. Sure, equity funds invest in a basket of stocks but a mutual fund portfolio may aim to diversify risk across sectors and companies. This diversity aims to mitigate the risk from owning individual stocks. Also, if you were investing directly in stocks, you would have to do all the risk-management on your own without any help from professional fund managers, who perform regular analysis and rebalancing.

3. “You Must Time the Market to Benefit from Mutual Fund Investment”

Many prospective investors believe they need to predict economic cycles or time market tops and bottoms accurately. However, mutual funds are inherently structured for longer-term horizons. The idea is to invest consistently - rather than waiting for a supposed “right moment” - because short-term market swings usually even out over years. Trying to guess precise entry or exit points can lead to missed rallies or being sidelined during recoveries. A better strategy is systematically investing, for instance via an SIP, allowing you to buy more units during dips and fewer when markets climb. Over time, this rupee-cost averaging approach helps average out purchase costs, minimising the stress of market timing.

4. “Mutual Funds Guarantee Fast Profits at Low Risk”

On the opposite extreme, certain individuals assume mutual funds always yield speedy returns with negligible downside. This myth can lull new investors into expecting quick gains, only to abandon ship when short-term performance is lacklustre. In reality, mutual funds vary, with some oriented toward aggressive growth, others aiming for slower, stable income, and still others seeking a balanced approach. Gains aren’t automatic: they depend on underlying market dynamics, asset allocations, and the fund manager’s skill. The prudent route is to align fund choice with your financial goals, risk tolerance, and timeframe - recognising that short-term performance can fluctuate, especially in equity-oriented funds.

5. “High NAV Indicates a Better Fund”

Sometimes new investors equate a higher Net Asset Value (NAV) with superior performance, presuming a fund at Rs. 200 NAV must be more robust than one at Rs. 50. NAV represents the per-unit value of the fund’s holdings – market value of its investments minus liabilities, divided by number of outstanding units. It isn’t comparable across different schemes as a measure of “cheapness” or “expensiveness.” A brand-new scheme might have an NAV around Rs. 10, while an older, longer-standing fund might have accumulated substantial growth over time. Rather than focusing on NAV alone, assess historical returns, the fund’s portfolio composition, expense ratio, and whether it aligns with your investment horizon.

6. “Mutual Funds Have Hidden Costs That Erase Gains”

While there are costs - like management fees, distributor fees, or exit loads - most legitimate funds clearly disclose such charges upfront. The mutual fund cost structure typically revolves around an expense ratio, which is capped by regulators. Over recent years, better transparency, competition, and scale have decreased expense ratios, allowing more of your gains to stay in your pocket. If you’re concerned about high costs, consider index funds or direct mutual funds that skip distributor commissions. In short, though mutual fund fees exist, they’re not secretive. By reading scheme documents and verifying expense ratios, you can pinpoint investments offering optimal fees.

7. “You Should Redeem Mutual Funds at the First Sign of Market Trouble”

A final myth suggests any market hiccup is a cause to sell. Indeed, short-term volatility might spook some, but it’s rarely wise to redeem solely based on brief market slides. Mutual funds often target medium- to long-term growth, absorbing intermittent corrections along the way. Exiting prematurely could lock in losses before a market rebound. Instead, evaluate your original objective: is it still years away? Are the fundamentals of the fund intact? If your plan remains valid, continuing to invest during dips can accelerate potential gains once markets recover. On the contrary, if your life goals or the fund’s underlying strategy have changed, a well-thought exit could be appropriate. The central point: avoid knee-jerk decisions, and rely on your overall strategy.

Conclusion

Each of these myths about mutual funds can distort decision-making and impede wealth generation. By recognising that mutual funds need neither large sums nor advanced market timing, new and seasoned investors alike can harness their flexibility and professional oversight. Moreover, thorough research - considering a fund’s track record, expense ratios, and alignment with personal risk levels - helps in selecting schemes likely to meet your goals, whether you’re saving for a child’s education or building a retirement corpus. Furthermore, consistent investing through a mutual fund SIP investment can help you ride out market swings, while keeping an eye on costs ensures more robust net returns. This synergy of discipline, diversification, and clarity about your timelines forms the bedrock of successful mutual fund strategies. Ultimately, by dispelling these mutual fund myths, you’re better positioned to create a portfolio that steadily works toward your financial aspirations.

Disclaimer:        

The information set out above is included for general information purposes only and is not exhaustive and does not constitute legal or tax advice. All complaints regarding Mutual Fund can be directed towards visit www.scores.gov.in (SEBI SCORES portal). Readers are requested to make informed investment decisions and consult Chaitanya Financial Consultants – 9000628943 / mfd.mmr@gmail.com to determine the financial implications with respect to investing in Mutual Funds.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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