5 Mutual Fund Myths BUSTED!

Myth 1: New Fund Offerings (NFOs) offer a better deal than existing mutual funds. It is better to buy units in a new fund offering at Rs 10 than an existing fund at a higher NAV.

Reality: The performance of the mutual fund whether existing or new scheme solely depends on factors like the skills and investment strategies adopted by the fund managers, quality of the portfolio, exposure to various industries and so on. In fact, when it comes to investment there is no difference between new schemes selling at par value or existing schemes selling at higher price. The return, as a percentage of the capital, which you have invested, will determine which investment was a better choice.

Myth 2: Shares generate higher returns. The stock market is more exciting and direct investing in shares generates higher returns than mutual funds.

Reality: The returns the mutual funds generate depend on the type of mutual fund scheme you select. That goes for shares too; the return you receive could be good or bad depending on the stock that you choose. For instance, index funds usually report returns that are in sync with the index, which they try to mirror while pure equity funds can outperform the index by a wide margin.

Myth 3: Investing in mutual funds is an expensive proposition. Mutual funds charge various expenses such as entry and exit loads, annual asset management fees and other expenses.

Reality: Though mutual funds levy various fees they are not an expensive proposition. When you invest directly too there are certain expenses that you will have to bear. In fact, the additional charges that you pay towards fund management, etc. end up benefiting you since it results in investment decisions which are better researched and more meticulous monitoring of the performance of your investments on a continuous basis.

Myth 4: Mutual funds guarantee returns. Some mutual funds assure their investors a certain level of returns.

Reality: Mutual funds are subject to market risks and do not guarantee any kind of returns to unit holders. The performance of mutual fund schemes should be compared with benchmark indices and judged accordingly. It is quite possible that even the best of fund managers may not be able to deliver consistent returns over the years.

Myth 5: Lower NAVs translate into better investment opportunities Mutual funds with lower NAVs can generate better returns.

Reality: Low NAVs do not mean a cheap investment opportunity. You need to look at the long term returns generated by the scheme in question. Here, returns mean capital appreciation and dividend paid, if applicable. The track record of the fund manager and the composition of the portfolio of the schemes are also critical factors which you should consider while choosing the right scheme.