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Planning to invest in mutual funds for the first time in 2017? We help debunk four myths related to mutual fund investing

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Assets mamanged by Indian mutual fund companies swelled to Rs 16.5 lakh crore (Rs 16.5 trillion) in November ’16. The recent demonetisation-led surge in banking liquidity could spur this figure to even greater heights in the coming months, albeit temporarily, as the scramble for deploying moneys out of low interest savings accounts and fixed deposits gathers momentum.

For all those considering mutual fund investments for the first time in 2017, it would be worthwhile to begin by quashing four commonly held myths related to mutual fund investing.

Myth #1: You Need to Have a High Degree of Financial Intelligence to Invest in MFs
Au contraire, mutual funds are in fact tailor-made for investors with a below-average working knowledge of financial markets. They employ expert teams of analysts and fund managers who work full time, analysing markets to uncover investment options that fit the fund’s objectives. Ironically, investors who are imbued with lower-than-average financial intelligence often fare better at mutual fund investing than sophisticated investors, who are more prone to churning their portfolios frequently in an attempt to “manage the manager”; usually to their detriment.

Rajiv Shastri, CEO & MD, Peerless Mutual Fund believes that one doesn’t need to be a market wiz to successfully invest in mutual funds. “In fact, mutual funds are ideally suited for those who would not normally invest in the financial markets directly, by offering them access to skilled fund management capabilities,” he says.

Myth #2: It’s Better to Invest in a Fund with a Low NAV

The misnomer that “low NAV (Net Asset Value) equals cheap” staunchly holds its ground as one of the more commonly held mutual fund myths in India. This is also the chief contributor to the wide proliferation of NFOs over the years, as uninformed investors continue queueing up to purchase a larger number of units at Rs 10.

“This is like saying that 10 notes of Rs 10 each are more valuable than a single note of Rs 100,” says Suresh Soni, CEO, DHFL Pramerica Asset Managers.

1: You need to have a high degree of financial intelligence to invest in mutual funds
2: It’s better to invest in a fund with a low NAV (Net Asset Value)
3: All mutual funds are linked to the stock markets
4: Past returns are indicative of future returns

A low NAV, which results in you buying more units for the same amount of money, does not in fact imply that you’ve got more “bang for your buck”. Irrespective of the number of units held, only the movement in the underlying securities within the fund’s portfolio matters in the end.

For instance, compare the performances of Reliance Growth Fund and Taurus Bonanza Fund, both diversified equity funds, over the immediately preceding 5-year period (see table). Had an investor, lured by the fallacious promise of “more units equal better return potential”, chosen to invest into Taurus Bonanza Fund, he would regretfully be sitting on severely compromised returns today; ten times more units notwithstanding!

“The NAV of a fund bears no relationship to its performance potential. Investors should focus their analysis on the portfolio of investments held by the scheme, and its suitability to their needs,” advises Shastri.

Myth #3: All MFs are Linked to the Stock Markets

Contrary to the popular belief that squarely equates mutual fund investing with stock market investing, all mutual funds do not in fact invest into stocks. There are mutual funds that invest across the spectrum of bond markets as well. There are a few hundred debt funds that take zero exposure to equities, and therefore, have lower risk and return potentials in tandem.

“It’s important to understand that each mutual fund has different risks and rewards. In general, the higher the potential return, the higher the risk of loss,” cautions Soni. “It is important to diversify your investments across various asset classes to mitigate risks,” he adds.

In fact, there are several sub-categories of debt funds too; ranging from the more volatile funds that invest into longer duration bonds, to the ones focused on garnering accruals arising from short-term debt instruments.

“There are funds for virtually every risk profile. For short-term investments and risk averse investors, liquid and other debt funds may offer significantly lower volatility solutions,” says Shastri.

Myth #4: Past Returns are Indicative of Future Returns
Fine print and hastily uttered disclaimers notwithstanding, this one continues to stand out as the greatest misconception of them all. It’s an injurious myth that just because a fund has returned 100 per cent in the previous year, the party will continue unencumbered. Many a time, one or two stock picks turn out to be fortuitous multi-baggers and result in aberrations; especially in the short run. That’s not good enough reason for you to pick that fund. On the contrary, remember the unwritten stock market rule that “what goes up, also comes down”. The markets are a great leveller!

For best results, approach funds that have shown a sudden spurt in their NAV’s with a measured dose of scepticism. Instead, opt for mutual funds that have held their own over a decade or more, cannily building out track records of outperformance across stormy and still markets alike. Invest keeping the future in mind; deploying moneys into mutual funds while staring obsessively into the rear-view mirror can cost you dearly.