Mutual funds have seen significant growth in India in recent years. According to data from the Association of Mutual Funds in India (AMFI), the assets under management (AUM) of the mutual fund industry in India stood at ₹40.04 lakh crore (approximately USD 488 billion) as of March 2021, up from ₹20.6 lakh crore (approximately USD 273 billion) in March 2018.
This growth can be attributed to several factors, including increasing awareness and acceptance of mutual funds as an investment option among retail investors, the government's efforts to promote financial inclusion and investor education, and the ease of access to mutual fund investment platforms through digital channels.
Even with such great numbers in terms of growth, there exists a huge under penetrated market for mutual funds. Rural part of India is yet to realize the power of mutual funds and the value that they can add to one’s investment portfolios. The reason for lower penetration could be partially attributed to a lot of myths in the minds of individuals regarding mutual funds.
In this article, we are going to talk about eight common myths about mutual funds in India.
Mutual funds invest only in stock markets: While mutual funds are promoted as a wealth creation investment option, there are over 30 categories of mutual fund schemes that offer various types of exposure. There are fixed income schemes known as debt mutual funds that invest in fixed income generating instruments like bonds, debentures & corporate deposits. These schemes have fixed income attributes, and the returns are not linked to stock markets.
Mutual funds are only for the long term: Equity oriented mutual funds are promoted as instruments of long-term wealth creation. They provide exposure to the listed companies that have a history of delivering higher returns in the long-term. However, there are mutual funds that offer returns for a period of as low as 1 day, these are overnight funds. Moreover, there are multiple types of debt mutual funds that offer returns with the investment horizon ranging from 1 month to 1 year to 3 years. An investor can invest in these funds based on the indicative horizon of the scheme.
Demat account is mandatory to invest in mutual funds: It is not mandatory to have a demat account to start investing in mutual funds, you can invest through the AMC website directly or you can invest through an advisor. The units will be held in account statement form & can be easily transacted through online/offline mode.
Mutual funds of bigger AMCs are safer: This myth is usually found in senior citizens or individuals in higher age brackets. It is important to note that the risk profile of any scheme is dependent upon the category of scheme and investment mandate. A mid cap scheme of HDFC mutual fund or Kotak mutual fund will have a similar risk profile as both schemes have the mandate to invest in mid cap stocks.
Lower NAV is cheaper: This is the biggest myth of all. Mutual fund’s appreciation has everything to do with the appreciation in NAV value in percentage terms and not an absolute value. If you invest Rs. 5 lakhs in a scheme with NAV of ₹10, and if the mutual fund performs great and in the next 5 years it doubles in value, then the NAV will rise to Rs. 20, and your fund value will rise to Rs. 10 lakhs. However, if the NAV was Rs. 100 per unit, still the effect would be the same for you. The NAV would have increased to Rs. 200 and your value would have increased to Rs. 10 lakhs.
More schemes in the portfolio means better diversification: Investment universe is defined by SEBI through categorization of mutual funds. For eg: large cap category funds have to invest a minimum 80 percent of their corpus in top 100 companies as per market capitalization. This means all the schemes in the large cap category will have a lot of similar stocks in them. Investing in multiple large cap funds would not lead to diversification. Investors should consider only 1 or 2 funds in a single category in their portfolio.
Past returns should be checked before investing: Past returns provide visibility regarding the wealth creation and consistency of the mutual fund scheme. However, past returns do not guarantee similar or higher returns in future. As an investor, we do not inherit past returns. Our research should be based on the experience of the fund management team, consistency in process, investment style. Past returns should not be a parameter to judge future performance of the scheme.
You must have a lot of capital to start investing in mutual funds: This statement is not true. An investor can start investing in mutual funds with as low as Rs. 1,000 in one-time mode and Rs. 100 in SIP mode. Anybody can easily afford to start with above amounts and enjoy the benefit of compounding.
Rohit Gyanchandani is Managing Director at Nandi Nivesh Private Limited