You badly want to invest in mutual funds. The problem…Your friends say, never invest in mutual funds. You will lose a lot of money. It is extremely dangerous to invest your hard earned money in mutual funds.
It is this myth and several other myths, which have made you and other investors, shy away from investing in mutual funds. Our citizens fear mutual funds only because of one thing….Fear of the unknown. They prefer to invest in fixed deposits, postal saving schemes or just leave money lying in a savings bank account. If you are one of these citizens, should you fear investing your hard earned money in mutual funds? Are all the myths on mutual funds justified? Is there any truth behind these myths?
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Before I give you an answer to this myth, you need to know what is a mutual fund. A mutual fund in India, is a financial instrument, which pools your and other investor’s money. This money is invested in stocks, if you opt for an equity mutual fund. The money is invested in Treasury Bills, Government Securities, Corporate Bonds and Money Market instruments, popularly called fixed income securities, if you opt for a debt mutual fund. Your money is invested in a mix of stocks and bonds, if you choose a hybrid fund.
The most important part of a mutual fund…Your money is managed by a professional, called a fund manager. The fund manager takes care of your money. If you invest in an equity mutual fund, the fund manager picks the right stocks at the right time. You don’t have to worry which stocks to pick, or when to buy and sell them. The mutual fund manager, does the research and analysis of the stocks. If you invest in debt funds, the fund manager picks up bonds (Government bonds + Corporate bonds) to invest your hard earned money.
Remember: Equity mutual funds can be a bit risky. Invest in them, only if you want high returns and are willing to bear risk. Studies have shown that over the long term (3 to 5 years or more), equity mutual funds are quite safe. Choose an adviser, who helps you to pick up a good mutual fund, which matches the risk you can bear and understands your financial goals.
Read More: How to invest in mutual funds
Systematic investment plan also known as SIP, is a method of investing in mutual funds. It is not an investment by itself. This method is often used to invest in equity mutual funds. You invest a certain pre-determined amount, (amount you have decided beforehand), at regular intervals of time, in the mutual fund. This might be once each week, once each month or once in a quarter. When the stock market crashes, net asset value (NAV) of most mutual fund schemes, also fall. You get to buy more number of mutual fund units, during these times. When the stock market is up, net asset value (NAV) of most mutual fund schemes, generally rise. You get to buy less number of mutual fund units.
A popular myth….You never lose money, if you invest in mutual funds through an SIP. SIP just helps you to bring down your average cost of purchase. You buy mutual fund units at different times. This brings down the cost of purchase of mutual fund units. If the stock market really crashes…(Remember the stock market crash of 2008)…Your SIPs would show negative returns. Investing your money in equity mutual funds through lump sum (all at once), actually gives higher returns, than investing through SIPs, in a rising stock market.
Remember: You do lose money, if you invest in equity mutual funds through SIP, especially if the stock market has crashed badly.
This myth is definitely not true. Yes…an equity mutual fund scheme, invests your money in equity. But, a debt mutual fund scheme, invests your money in Government bonds, Corporate bonds and money market instruments. Investments in debt mutual funds are much safer than equity mutual funds. There is one thing….You don’t get the high returns of equity mutual funds.
If you want higher returns and less taxes than fixed deposits, you must consider an investment in debt mutual funds. The interest you earn on FD’s is taxed. The debt mutual funds enjoy indexation benefits.
See Also: Equity Mutual Funds vs Stocks
Let’s end this article with a final myth. The best way of investing in mutual funds, is through 5 star rated funds. Mutual funds get star ratings, based on past performance. A fund gets a 5 star rating, based on past performance. A good past performance is no guarantee of a good future performance. Be Wise, Get Rich.
Mr C.S.Sudheer is a management graduate. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.
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