MYTHS & FACTS ABOUT MUTUAL FUNDS

Myth- Mutual Funds are only for Experts: -

Fact:  In fact, Mutual funds are meant for of common investors who may lack the knowledge or skill set to invest in securities market. Mutual Funds are professionally managed by expert Fund Managers after extensive market research for the benefit of investors. A mutual fund is an inexpensive way for investors to get a full-time professional fund manager to manage their money. At Investment Planet, we help you in selecting appropriate mutual fund scheme as per your financial goal, time horizon and risk appetite. 

Myth:- Investment in Mutual Funds is a tedious and complex job or I dont know how to invest in mutual funds.

Fact:-Investment in Mutual Fund is a very simple process but before investing in a mutual fund scheme, whether through online mode or via conventional paper-based mode, one must first complete the KYC process by filling up the prescribed KYC form.

You just need documents such as Pan Card, Adhar Card or any other prescribed Address proof and your one photograph. It is one time activity. Once your KYC is done you can invest in any scheme of any mutual fund then there is no need of these documents for investment. 

• Online mode- one may also choose to invest online through our website www.investmentplanet.in by using login id and passwd provided by us. To avail this facility, one must complete a one-time online registration with us. We provide you BSE-StAR MF technology-based service platform for MF Transactions.

• Forms & Cheque- One can invest in mutual funds by submitting a duly completed mutual fund application form along with a cheque or bank draft at our office.

You need not to worry about how to invest in Mutual funds. Our experts will complete all formalities on your behalf either on line or paper based as per your convenience and comfort. It is very easy and simple.

Myth- Mutual Funds’ investments are only for the long term:-

Fact: Mutual funds can be for the short term or for longer term based on one’s investment horizon and objective.

There are different types of mutual fund schemes – which invest in different types of securities – in equity as well as debt securities that are suitable for different investor needs.

In fact, there are various short-term schemes where you can invest for a few days to a few weeks to a few years e.g., Liquid Funds are low duration funds, with portfolio maturity of less than 91 days, while Ultra Short-Term Bond Funds are low duration funds, with portfolio maturity of less than a year. There are Short-Term Bond Funds which are medium duration funds where the underlying portfolio maturity ranges from one year – three years. Then, there are Long-Term Income Funds which are medium to long duration funds with portfolio maturity between 3 and 10 years.

While Equity Schemes are most suitable for a longer term, debt mutual funds are suitable for investors with short term (less than 5 years) investment horizon.

 Myth: - Investing in Mutual Funds is the same as investing in Stock market/Mutual Fund is an Equity Product.

Fact: Mutual funds invest in stock market (i.e. equities), bond market (corporate bonds as well as govt. Bonds) and Money Market instruments such as Treasury Bills, Commercial Papers, Certificate of Deposit, Collateral Borrowing & Lending Obligation (CBLO) etc. Many of these instruments are not available to retail investors due to large ticket size of minimum order quantity (such as G-Secs) and Hence, retail investors could participate in such investments through mutual fund schemes. 

 Myth: - Mutual Fund scheme with a NAV of Rs.10/- or lover is better or investing in NFO are preferable than investing in existing schemes.

Fact: This is a common misconception. A mutual fund's NAV represents the market value of all its underlying investments. NAV of a fund is irrelevant, because it represents the market value of the fund’s investments and not the market price. Any capital appreciation will depend on the price movement of its underlying securities. Let us understand this through an illustration.

Suppose, you invest Rs.10, 000 each in scheme A whose NAV is Rs.20 and scheme B (whose NAV is say, Rs.100. You will be allotted 500 units of scheme A and 100 units of scheme B. Assuming that both schemes have invested their entire corpus in exactly same stocks and in the same proportions, if the underlying stocks collectively appreciate by 10%, the NAV of the two schemes should also rise by 10%, to Rs.22 and Rs.110, respectively. Thus, in both the scenarios, the value of your investment increases to Rs. 11,000.

Thus, the current NAV of a fund does not have any impact on the returns.

Myth: One needs a large amount of money to invest in Mutual Funds

Fact: Absolutely incorrect. One could start investing mutual funds with just Rs.5000 for a lump-sum / one-time investment with no upper limit and Rs.1000 towards subsequent / additional subscription in most of the mutual fund schemes. And for Equity linked Savings Schemes (ELSS), the minimum amount is as low as Rs. 500.

In fact, one could invest via Systematic Investment Plan (SIP) with as little as Rs.500 per month for as long as one wishes to.

Myth: One needs to have a demat account to invest in mutual funds

Fact: Holding mutual fund Units in Demat mode is absolutely optional, except in respect of Exchange Traded Funds. For all other schemes, including the close-ended listed schemes like Fixed Maturity Plans (FMPs), it is entirely up to the investor whether to hold the units in a Demat mode or in conventional physical accountant statement mode.

Myth: A scheme with higher NAV has reached its peak!

Fact: This is a very common misconception because of the general association of Mutual Funds with shares. One needs to keep in mind that the NAV of a scheme is nothing but a reflection of the market value of the underlying shares held by the fund on any day. Mutual Funds invest in shares, which may be bought or sold whenever deemed appropriate by the Fund Manager depending on the scheme’s investment strategy (Buy-Hold-Sell). If the Fund Manager feels that a particular stock has peaked, he can choose to sell it.

A high NAV does not mean the fund is expensive. In fact, high NAV indicates a good performance of the scheme over the years.

 Myth: Buying a top-rated mutual fund scheme ensures better returns

Fact: Mutual fund ratings are dynamic and based on performance of the scheme over time – which in itself is subject to market fluctuations. So, a Mutual fund scheme that may be on top of the rating chart currently, may not necessarily maintain the same rating month after month or at a later date. However, a top-rated fund is a good first step to short list a scheme to invest in (although past performance does not necessarily guarantee better returns in future). Investment in a mutual fund scheme needs to be tracked with respect to the scheme’s benchmark to evaluate its performance periodically to decide whether to stay invested or to exit. At Investment Planet, we help you in selecting appropriate mutual fund scheme as per your financial goal, time horizon and risk appetite.

What is SIP ?

Systamatic Investment Plan (SIP) is an investment plan (methodology) offered by Mutual Funds wherein one could invest a fixed amount in a mutual fund scheme periodically,at fixed intervals – say once a month, instead of making a lump-sum investment.

The SIP instalment amount could be as little as Rs.500 per month. SIP is similar to a recurring deposit where you deposit a small /fixed amount every month.

SIP is a very convenient method of investing in mutual funds through standing instructions to debit your bank account every month, without the hassle of having to write out a cheque each time.

SIP is a simpler approach to long term investing is disciplining and committing to a fixed sum for a fixed period and sticking to this schedule regardless of the conditions of the market.

RUPEE COST AVERAGING

Rupee cost averaging, as this practice is called, in a way ensures that you automatically buy more units when the NAV is low and fewer when the NAV is high…e.g., an SIP of Rs.1000 gets you 50 units when the NAV is Rs. 20, but gets you 100 units when the NAV is Rs.10. The average cost for buying those 150 units would be Rs. 2000/150 units i.e. Rs. 13.33.

However, please remember that the Rupee cost averaging does not assure profit, nor does it protect one against investment losses in declining markets. It merely ensures disciplined & regular investment in stock markets, which helps overcome the natural impulse to stop investing in a falling or a depressed market or investing a lot, when markets are buoyant and euphoric.

THE POWER OF COMPOUNDING

There is a great advantage with long-term investments, namely, compounding which is considered one of the greatest mathematical discovery.To put it in simple words, compounding is when the interest (or income) you earn is reinvested in the original corpus and accumulated corpus continues to earn (& grow). Every time this happens, your investment keeps growing, paving the way for a systematic accumulation of money, multiplying over time.To illustrate, a small amount of Rs.1000 invested every month at an interest rate of 8% for 25 years would give you Rs.9.57 Lakh! That means your investment of just Rs. 3 Lakh would have grown three times over! Here is a graph that represents the same for a time period of 15 years.

STARTING EARLY PAYS WELL

To get the best out of your investments, it is very important to invest for the long-term, which means that you should start investing early, in order to maximize the end returns.

Let’s understand this better through an illustration –

Let's assume that two friends, both aged 25, decide to invest Rs. 2000 every month for a period of 5 years and earn 8% p.a. on a monthly compounding basis. The only difference is that while one starts investing promptly at the age of 25 itself, the other starts investing 10 years later at the age of 35 years. Both decide to hold on to their investments till they turn 60. So, while both of them would accumulate principal investment of Rs.1.2 Lakh over a period of 5 years, the investment of the person who started early at the age of 25 appreciates to over Rs. 14 Lakh, the investment of the second person who started later grows to only about Rs. 6 Lakh.

Thus, you can clearly see the difference between the two and the clear advantage of investing early. So, go ahead. Start investing through SIP today itself.

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