10 mutual fund myths that every investor should know

10 Mutual Fund Myths: SIP inflow in mutual funds rose to a record high of Rs 17,073.30 crore in November 2023, a sharp 6 per cent rise from the previous month. Among equity funds, large caps' year-to-date (YTD) return is 23.85 per cent; large and mid-cap mutual funds have risen 28.91 per cent; mid caps have grown 38. 32 and small caps have soared 42.20 per cent in the same period.   

Investors have been flocking to mutual fund investments since the share market is scaling new heights every other day.

Just since June 2020, BSE Sensex has risen from 35,000 to over 70,500 as on Wednesday, (December 20, 2023). 

While high returns of mutual funds in the recent past are most likely to attract new investors, there are many myths around mutual fund investments that bother a new investor or even a seasoned one who hasn't researched much about them.

In this write-up, we will tell you about some of those myths.

You can buy and ignore mutual fund investments

Mutual fund investments are more beneficial for investors with a long-term investment horizon.

But people think that you can invest lump sum money in a mutual fund and forget about it for years.

The fund will automatically grow through compounding.

It may be true to some extent, but that may not always be the case.

The fund can perform below its index or can also slip into a negative return.

So, even if you are opting for lump sum investment, keep track of your investments every three or six months.

If they are not performing well, you may move to a better-performing mutual fund.

SIP is only for small investor

A systematic investment plan (SIP) is for everyone, whether you are investing Rs 1,000 a month or Rs 1 lakh a month.

Though many mutual funds offer investments through SIP for as little as Rs 100, SIP can be of any size.

A SIP is a way to balance out your investment in the long run. It has nothing to do with the size of investment.

Returns are guaranteed

Though mutual funds have shown tremendous growth in the last few years, they are market-linked and can also show negative growth.

The returns depend on the type and volatility of funds, investment duration, and many other factors.

We can't withdraw mutual funds for years

We can withdraw mutual funds at any time.

Though you have to pay the exit load if you redeem your investment within a certain date, you also have the option of a monthly income plan and a systematic withdrawal plan, which allow you to withdraw your income from mutual funds on a monthly basis or for a predetermined period.

I need a Demat account to invest in a mutual fund

A lot of people think that they need to open a demat account before investing in a mutual fund.

A demat account is necessary only for stock market investments.

One can buy mutual funds without having a demat account.

However, a demat account helps, as with that, you can hold all of your investments in one place and also get a single statement to view the performance of mutual fund investments.

Stopping SIP means penalty

You are free to stop your SIPs at any time, and you won't be charged anything for stopping them.

You can also restart the SIP whenever you want.

Fund House will penalise me for missing SIP payment

A fund house doesn't put any penalty on you if you miss a SIP installment due to insufficient balance in your bank account, but your bank does.

The charges for missing SIPs may be different for a public or private bank.

A mutual fund house cancels your SIP if you miss your payments for three months in a row.

Equity funds always better than debt funds

It's like an apples vs. oranges comparison.

While historic returns of equity funds are much higher than debt funds, there is no guarantee that an equity fund will repeat its past performance or that every equity fund will give positive returns.

Debt funds, on the other hand, are consistent performers since they invest their money in fixed income instruments such as corporate and government bonds.

We need to do KYC for every investment

While the Know Your Customer (KYC) process is necessary for mutual fund investment, it is a centralised process, and you don't need to repeat it with every investment.

Once it is done, you can invest in as many mutual fund schemes as you like.

We can invest only through an agent

Though taking assistance from a qualified agent or an experienced investment company can be beneficial for a beginner investor, one is free to invest money directly in a mutual fund.

Financial planner or MF distributor can gauge market movements

They may have good analysis reports of the market's past movements, but no one can predict market movements in the long term.

The share market performance depends on a lot of internal and external factors.

Even if internal factors are in sync, external factors can derail the market, as happened during the coronavirus pandemic.