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Over the past decade, mutual funds have become increasingly popular among Indian investors.
Over the past decade, mutual funds have become increasingly popular among Indian investors. Yet, despite growing awareness, many misconceptions continue to prevent people from making informed financial decisions. Whether it’s confusion about risk, potential returns, or who mutual funds are meant for, these myths can lead to unrealistic expectations or even complete avoidance of a potentially useful investment tool.
In this article, we’ll explore and debunk some of the most common myths associated with mutual fund investing, with a focus on helping Indian investors separate facts from fiction. We will also touch upon categories like large cap funds to clarify how different schemes operate.
One of the most common misconceptions is that mutual funds are complicated and suitable only for those who are financially savvy or earn a high income. This is far from accurate.
In reality, mutual funds are designed to be accessible to all types of investors. Even a first-time investor with limited financial knowledge can begin with a Systematic Investment Plan (SIP) of as little as Rs. 500 per month. These schemes are professionally managed, making them suitable for individuals who may not have the time or expertise to actively manage investments.
Many people assume that mutual funds always offer high returns or that a particular scheme will deliver the same performance every year. This belief can lead to disappointment if actual returns fall short of expectations.
It’s important to understand that mutual funds do not offer guaranteed returns. The performance of a scheme depends on the market movements of the underlying securities. For example, large cap funds, which invest in top 100 companies by market capitalisation, may show relatively more stability than mid or small cap funds, but they too are exposed to market risks.
Any historical information or past data should not be taken as an indication or guarantee of any future performance.
Risk is often misunderstood. While mutual funds do carry market risk, not all funds are equally volatile. The level of risk depends on the category of the fund.
For instance, debt funds or hybrid funds may carry lower volatility than equity funds. Within equity funds, large cap funds are generally considered to have relatively lower volatility compared to small cap funds, as they invest in well-established companies.
This is another widespread misunderstanding. While equity mutual funds do invest in shares of listed companies, investing in a mutual fund is not the same as directly buying stocks.
When you invest in a mutual fund, you are part of a pooled investment managed by professionals who make decisions on your behalf. This approach allows you to benefit from research, and risk management strategies that individual stock investments may not offer.
Also, categories like debt funds, hybrid funds, or large cap funds offer a variety of options beyond just equities, helping investors diversify without managing multiple instruments directly.
While mutual funds are generally preferred for long-term wealth creation, they are not restricted to long-term goals alone. There are short-duration debt funds and liquid funds that cater to short-term financial needs such as building an emergency fund or parking surplus money.
The key is to match the scheme’s objective and investment horizon with your personal financial goal. For example, large cap funds may be suitable for investors looking for relatively stable growth potential over a 5- to 7-year period, while low-duration debt funds may suit someone with a 6- to 12-month horizon.
Net Asset Value (NAV) is often misunderstood as a measure of the fund’s worth. A low NAV does not mean a fund is cheaper or more attractive, just as a high NAV doesn’t mean the fund is expensive.
NAV simply reflects the per-unit value of the fund’s portfolio. What matters more is how the fund’s underlying investments perform over time and whether the scheme aligns with your financial goals.
Mutual funds offer a structured and flexible way to participate in financial markets, but common myths can hinder their effective use. By understanding what mutual funds are—and what they are not—you can make better decisions aligned with your financial objectives.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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