Wednesday, 15 February 2012

Myths of Mutual Fund

stuart miles

NFO Myth: NFO (New Fund Offer) are better than buying an existing fund with High NAV
Reality: To cure yourself do you visit a doctor who is out of college with nill experience?  No Right? NFO is like doctor out of college without any experience. So when you invest in NFO, you are investing in a fund with no past performance.  It is always better to see the past performance of fund while investing.
Tax Benefit Myth: You get tax benefit by investing in Mutual Funds.
Reality: Partially True. Only by investing in ELSS mutual funds you get tax benefit. This has lock in period of 3 years.

tax Free Returns Myth: Returns of mutual funds are tax free
Reality: Partially true. If the fund invests more than 65% of its corpus in equity, returns are tax free if it is held for more than one year. Gains from other funds are added to your income and taxed as per regular income tax rules.

Mutual Fund Dividend Myth: You should invest in mutual funds that give good dividend.
Reality: This is completely untrue. Stock Dividend and Mutual funds dividend are completely different. When a Mutual fund announces dividend, the NAV is adjusted accordingly. In fact if it is better go for Growth option rather than dividend option. The expenditure that is incurred in dividend distribution is borne by the people who are who are under dividend scheme.

Example: Current NAV 100 Rs. Dividend announced 100%.    Dividend is on FACE Value and not the NAV value. So (100% of 10= 10) Post dividend the NAV is reduced to 90 (100-10)
Demat Account Myth: You need to have Demat account to invest in Mutual Funds.
Reality: This is complete false. You can invest in Mutual funds by just filling a form. PAN is must to invest in Mutual Funds.
Direct Investment Myth: By directly investing in stocks you can earn better returns than Fund Manager.
Reality: Beating the Market continuously is very difficult. You can do it for one or two years but not consistently.  Mutual Fund Companies have team that continuously watches Market and monitor the company performance every quarter very closely. They are better person to handle your money.Top Performing funds have given CAGR OF close to 28% for last 10 year or so. It is tough for individual investor to match this performance consistently.


Large Corpus Fund Myth: More the corpus more is the opportunity for Fund manager to diversify, hence e better Returns
Reality: Partially True. Corpus will help in diversification but if the corpus continues to grow, it becomes difficult for Fund manager to Manage. This might force fund manager to compromise on his stock selection. This in turn might affect the fund performance.

SIP Myth: Investing in mutual funds via SIP will always result in more profits compare to lump sum investment.
Reality:  This is not true. SIP is best way to beat the market volatility. In other words in volatile market returns or SIP are better than lump sum investment. In Bull Run the rupee cost averaging does not come into picture. With every passing month you end up getting lesser units and thus reducing the returns. Person who has invested in lump sum would stand to benefit in bull run.
Balanced Fund Myth: The investment is 50:50 debt to equity
Reality: This is not true. It can be 65% in equity and rest in debt. It could also be 40% in equity and 60% in debt.

Most common Myth: A fund with a net asset value (NAV) of Rs 10 is cheaper than the one whose NAV is Rs 100.
Reality: This is biggest misconception new investors have. Bigger NAV is just an indication that it is old fund.
Example:  You invest 1000 Rs in two funds .Fund X with NAV 10 and Fund Y with NAV 100. You end up getting 100 Unit of X and 10 Units of Y. Suppose after a Year Fund X gives return of 10% and Fund Y gives returns of 20%.  Effectively The NAV of X has increased to 11 and NAV of Y has increased to 120.

Your investment in Fund X has become 100*11 = 1100 and Investment in Y becomes 10*120 = fund that looked cheaper gave lesser returns.
Do you have any of these Myth?


Anonymous said...

Very good article

WealthUCreate said...

Thank You Boss.

indianist said...

How to select a Mutual Fund? and Pls give some information on mutual fund, which mutual fund is good to invest?

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