Mutual Funds: Five Myths Demystified

Mutual funds have emerged as a preferred investment tool to generate wealth corpus in the long run. However, sometimes, investors tend to have a few myths about investing in mutual funds. 

Here’s the lowdown on some of the myths associated with mutual funds, which an investor must choose not to fall for. 

Mutual fund investments call for in-depth financial knowledge: Mutual funds are mostly managed by professional financial advisors referred to as fund managers. Depending on market movements, these financial experts manage and implement investment strategies on behalf of an Asset Management Company (AMC) or fund house. 

Mutual funds provide guaranteed returns:  Mutual funds are market-linked investments, and their performance is related to market fluctuations. That’s why the returns provided by mutual funds cannot be guaranteed and may experience ups and downs depending on the market’s performance. For instance, equity funds, which primarily invest in stocks, have the potential to offer inflation-beating returns. On the other hand, debt funds invest a considerably lower portion in equity funds and may be able to offer relatively stable but lower returns as compared to equity funds.

Top-rated mutual funds guarantee higher or better returns: Typically, mutual fund ratings are undertaken based on multiple factors such as the fund’s performance along various market periods, the AMC or fund house it belongs to, the fund’s manager’s expertise, its asset allocation, and inflation-based returns. This rating may vary with an alternation in any of the determining factors. So, investing in a top-rated fund is no guarantee for higher or better returns.

Mutual funds invest in equity markets alone: Multiple types of mutual funds that can cater to the financial goals of various investors are available. Equity mutual funds have a relatively higher risk as they invest primarily in stocks. Debt funds invest in debt instruments such as government securities (G-Secs), debentures, bonds, and corporate fixed deposits (FDs). While they carry a comparatively lower risk than equity funds, they offer lower returns, too. At the same time, hybrid mutual funds are another type of mutual fund that invests in a mix of equity and debt instruments, thereby balancing the risk factor.

Mutual funds need multiple times of Know-Your-Customer (KYC) formalities:  On investing in mutual funds, the AMC or fund house an investor is investing with will require them to complete the KYC verification process. It is a one-time process that is not required to be repeated unless an investor plans to invest with a different fund house. In case an investor is investing in mutual funds through a financial investment advisor, they may be required to carry out the KYC process once for investments with multiple fund houses. Also, with the e-KYC facility, an investor can complete the KYC process online.