6 Investment Myths That Need to be Debunked

There are many misleading pieces of information due to which many investors stay away from mutual funds. The fact is that if the right mutual fund is chosen according to the investors’ risk appetite, age and goals, then it can build wealth in the long term.

Here are some mutual fund myths that need to be dispelled:

1. Rs 100 Net Asset Value (NAV) is better than Rs 120 NAV

In direct stocks, the price of a Rs 100 stock looks cheaper than a Rs 200 stock. While in mutual fund investing, a portfolio is made up of a bunch of stocks valued daily at that price. A lower NAV would give you more units, while a higher NAV would give you a lesser number of units. But the value of your investment in both cases would be the same.

To understand this, let's look at some numbers:

You have Rs 5,000 to invest. Now,

Scheme 1: NAV Rs 100. You will get Rs 5,000/100 = 50 units here.

Scheme 2: NAV Rs 120. You will get Rs 5,000/120 = 41.67 units here.

Now assume that the markets increased by 10 per cent.

Scheme 1: The NAV goes up to Rs 110

Scheme 2: The NAV goes up to Rs 132

With the market moving up, let's see the market value of these investments

Scheme 1 : 50 units * 110 = 5500

Scheme 2: 41.67 units * 132 = 5500

This shows that in both the schemes, you get the same returns in both schemes. So, NAV is not the best parameter while choosing between two schemes.

2. Mutual funds are all about shares

A mutual fund is a route to buy various assets. These assets include equities within which there are different kinds of stocks that you have. 

3. Dividend plans are better than growth plans because you get something back

In dividend plans, the profit made by the mutual fund scheme is paid out to the investors at certain intervals, while in growth plans, the profits are reinvested in the scheme instead of being paid out by the investors. A dividend plan might not be a great choice for investors who don’t need regular income as the money might just sit idle in the bank account. In the expansion option, the dividend is reinvested automatically. So, the selection of either option depends on individual choices and needs.

4. Mutual funds are difficult to sell

Mutual funds are favourably liquid investments. Mutual fund units can be redeemed anytime, and the money will be deposited to the designated bank account within a certain timeframe.

5. You get better returns if you pick a top-rated fund

The mutual fund which is on the top rating chart currently may not maintain the same rating going forward. Top-rated funds have the potential to do well. But there is no guarantee that they will do well, maybe because of fluctuating market conditions.

6. You must stop your Systematic Investment Plans (SIPs) when the markets are rising

Predicting the future market trend is impossible. It is not a good decision to wait for the markets to correct and then start investing as you would face a loss of opportunity. The stock market might appear to be high in the short term, but you never know until when this rally will continue. It is the best practice to continue SIPs for the long term regardless of market disturbances. This will help the investor to build a healthy corpus and achieve his/her goals. Make informed investment decisions by steering clear of mutual fund misconceptions. Set your financial goals and start your investment journey with mutual funds to build wealth over the long term and achieve financial goals.

(The author is the Co-Founder of Tarrakki. Views are personal)

(DISCLAIMER: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)