Top 6 Myths and Facts About Mutual Funds You Must Not Skip
A mutual fund is an investment instrument in which a group of participants combine their money to obtain a return on their investment over time. An investing specialist known as a fund manager or portfolio manager oversees this pool of funds. To maximize profits, they are responsible for investing the funds in various securities such as bonds, stocks, gold, and other assets. The investment gains (or losses) are split among the investors in proportion to their contributions to the fund.
Why should you invest in mutual funds?
You've probably heard, "don't put all your eggs in one basket." When it comes to investing, this is a well-known slogan to remember. If you invest in one asset, you risk losing money if the market crashes. You can, however, avoid this problem by diversifying your portfolio and investing in other asset types. If you invest in stocks and want to diversify, you must carefully select at least ten stocks from various industries. This can be a time-consuming and lengthy process. When you invest in mutual funds, on the other hand, you get quick diversification. For example, if you buy in a mutual fund that tracks the BSE Sensex, you will access up to 30 securities from various sectors. This could significantly lower your risk.
One of the most significant mutual fund advantages is the possibility of earning possibly larger returns than standard investing solutions that provide guaranteed returns. This is because mutual fund returns are connected to the market's success. So, if the market is on a roll and performing well, the impact on the value of your fund will be recognized. On the other hand, poor market performance may hurt your investments. Mutual funds, unlike traditional investments, do not guarantee capital protection. So do your homework and invest in funds that will assist you in meeting your financial objectives at the appropriate moment in your life.
By participating in Equity Linked Savings Schemes, mutual fund investors can receive a tax deduction of upto Rs. 1.5 lakh (ELSS). Section 80C of the Income Tax Act qualifies you for this tax relief. The lock-in period for ELSS funds is three years. As a result, you can only take your money out once the lock-in period expires if you invest in ELSS funds.
Asset class-based fund types include:
Investing in debt funds:
Debt funds (sometimes fixed-income funds) invest in assets such as government and corporate bonds. These funds strive to provide investors with reasonable returns and are considered less risky. These funds are significant if you want a consistent income and don't want to take risks.
Funds that invest in stock:
Equity funds, in contrast to debt funds, invest inequities. The goal of these funds is to increase their value over time. However, because the returns on equity funds are connected to stock market movements, these funds are riskier. They're a fantastic choice for long-term goals like retirement planning or homeownership because the level of risk decreases over time.
Funds with a hybrid strategy:
What if you wish to invest in both equities and debt? Hybrid funds are the solution. Hybrid funds hold a mix of equities and fixed-income securities. Hybrid funds are divided into subcategories based on allocating their assets between equity and debt (asset allocation).
A Myth is a commonly believed but ambiguous or obscure belief. These frequently build a buzz around a particular topic or event, conditioning individuals to think in the same or similar ways. Similarly, there are numerous misconceptions concerning mutual fund investments. Investors must be able to debunk falsehoods to have a positive investment experience, achieve financial goals, and build wealth.
Mutual fund myths and realities:
Myth: Mutual funds are appropriate for experienced investors.
Fact: FALSE! It is, in truth, a straightforward financial investing help that does not necessitate rocket science. It's for anyone who wants to make more money. The risk appetite of the investor influences the fund selection. Individuals can choose from various products depending on their aims and age. And, once money has been placed in mutual funds, their Net Asset Value can be tracked daily.
Myth: Mutual funds necessitate a substantial investment.
Fact: Mutual funds do not require significant initial investments; you can begin with as little as Rs. 500 per month through a tool known as a Systematic Investment Plan (SIP) in a mutual fund, which allows you to invest a regular monthly installment in the fund, based on which units will be purchased in your folio. The earlier you begin investing, the better because your money will compound for a longer time.
Myth: Investing in top-rated mutual funds ensures success.
Fact: The performance of mutual funds is subjected to market risks and can fluctuate from time to time. As a result, it is impossible to predict whether a fund that has done well in the past will continue to do so. Mutual fund investments must be monitored and examined regularly to ensure that they perform as expected by the investor.
Myth: Equity is preferable to debt, and one cannot invest in both.
Fact: False! An investor invests in Mutual Funds to attain specific objectives. These objectives could be long-term or short-term, and how they want to attain them decides whether an equity-oriented or a debt-oriented fund should be chosen. Both equity and debt funds have distinct characteristics. Investors sometimes want to combine the two and choose a 'Dynamic Fund' or a 'Balanced Fund' that can adjust its performance to market conditions. As a result, the concept that one is superior to the other is incorrect. It is dependent on the investor's criteria.
Myth: It would help if you chose the most acceptable track record scheme.
Fact: Past performance alone should not be used as a predictor of future performance. This is because markets and economic conditions are constantly shifting. Therefore, before investing, it is preferable to consider the reasons for the fund's performance, its underlying assets, and the fund manager's experience.
Myth: SIPs are usually preferable to one-time investments.
Fact: When the market is volatile, or you don't have enough funds to invest in a lump sum amount, SIP investing is an excellent choice. A lump-sum investment may be a preferable alternative in a rising market or long-term investing.
Making informed financial decisions necessitates avoiding mutual fund myths. Now that we've debunked a few fallacies, you may begin your mutual fund investment journey with realistic financial goal roadmaps.
The views and investment tips given by the writer on www.snsgroup.in are their own and not that of the website or their management. snsgroup.in advises users to check with certified experts before taking any investment decisions.
Mutual Fund investments are subject to market risks. Read all scheme documents carefully. The past performance of mutual funds is not necessarily indicative of the future performance of the schemes.