Mutual funds are a great way to invest for future financial needs - saving for children's education, buying property, or planning retirement. But several myths surround mutual fund investing, which confuses investors and restricts them from investing in these financial tools. But we must debunk these myths and learn the truth about mutual fund investing to make intelligent choices regarding our finances.
It Needs Huge Investment
People often believe that they need to make a substantial investment in mutual funds to earn good returns. But the truth is just the opposite. Mutual funds work on the principle of compounding, which lets you make a substantial return from long term investment.
You can indeed make significant investments under mutual funds, but it is not necessary. You can invest any amount that suits you, starting with Rs 500. If you are starting young, it gives you more time to stay in the market and increase returns. With even small monthly and regular investment, you can get considerable returns on maturity. Mutual funds are flexible, and you can increase the SIP amount as your income increases.
Cumbersome Documentation
Completing KYC documentation is a one-time exercise made compulsory by SEBI. You can complete the process through a SEBI registered intermediary for the first time. You don't need to undergo the same if you approach another intermediary later.
As a first-time investor of a mutual fund, you would need to complete a 'know your customer (KYC)' form and submit required documents per KYC requirement, including:
- Proof of Identity (POI)
- Proof of Address (POA)
- Latest photograph
You Need A Demat Account
It is a common mistake that most first-time investors make. But mutual fund investors have the option to receive their units as physical statements or in dematerialised format. Demat account is not mandatory for mutual fund investment.
First-time investors need to complete their KYC formality and submit it along with the investment application. Once your KYC documents get verified, your investment application gets accepted.
Exiting A Mutual Fund Is Difficult
The myth regarding the lock-in period stops investors from investing in mutual funds. But the truth is one can stop and initiate a SIP at any time, depending on cash flow. Unless you have invested in an equity-linked savings scheme (ELSS) that offers tax benefit of up to Rs 1.5 lakh u/s 80C of Income Tax Act, which has a lock-in period of three years, other mutual funds are flexible.
You Need To Invest For Long-term
Long-term investment in mutual funds indeed allows you to reap the benefit of compounding. But it is not compulsory. One who needs quick returns can also invest in mutual funds. There are mutual fund schemes for every investment purposes; short-term, mid-term, or long-term. Those who are looking for short-term returns can invest in short-term debt funds. Equity funds are suitable for long-term investment.
Mutual funds are one of the easiest ways to invest, even when you have limited knowledge about the market. However, misconceptions often prevent investors from selecting the best investment option for them. Once you debunk mutual fund myths, you can make an intelligent choice and choose a suitable investment option.
If you are looking for tips on how to invest in mutual funds, check the following.
Decide your investment goal: You need to select a mutual fund investment strategy according to your short-or long-term goals. If you are planning for retirement or children's education, an equity-based mutual fund is best. However, if the objective is short-term, protect your returns with a debt fund.
Select the right investment strategy
Selecting an investment strategy becomes easy based on your goals.
- Long-term: When you are investing for a long-term, invest in equity funds that generate higher returns based on compounding. You would need to look for mutual funds that are labelled as growth funds.
- Mid-term: If you are looking at an investment period of 5-10 years or investing in equity funds makes you nervous, then you should look for balanced funds. These funds invest a substantial portion of the corpus in bonds to balance the risk factors.
- Short-term: When you are only a few years away from your investment goal, invest in debt funds. These funds invest in top debt instruments that reduce risk. Debt funds invest 70-80 percent corpus in debt instruments.
Research suitable options
Based on your objectives, select mutual fund schemes. Research the following while selecting a potential investment option.
- Past performance:Although the fund's past performance does not guarantee its future performance, it is a good starting point to understand what to expect.
- Expense ratios:Expense ratio is a charge that investors need to pay to cover the expenses of buying the fund's investment and the fund manager's compensation. Although most funds charge a 1 or 2 percent expense ratio, it is essential to notice since it can change your returns.
- Load fees:Like the expense ratio, load fees can also impact the return on your investment. You can avoid paying load fees by selecting a no-load fund.
- Management: An actively managed fund aims to beat the market index and charge higher fees than a passively managed fund. Hence, depending on whether it is an active or passively managed fund, the total investment cost would differ.
Set a plan to invest regularly
To grow wealth to reach your money goals, you need to develop a plan to invest periodically that aligns with your current and future requirements. Setting a SIP not only helps you become disciplined but offers benefits like rupee cost averaging. Further, SIP reduces market risk.
Now that you have learned the truths about mutual funds, start investing with confidence.
