“Where there is an open mind, there will always be a frontier” – Dorothea Brande
Most people approach mutual fund investments with some preconceived opinions. They have formed these opinions over a period of time. As a result, many times these preconceived notions prevent them from exploring the versatile world of mutual funds. In this article, I will try to dispel some of the myths:
I don’t want to invest in mutual funds as I can’t risk my money in stock markets
Risk averse investors, already retired or people approaching their retirement often think that the option of mutual fund investments is not for them. They think that mutual fund investments mean stock market investments and are hence inherently risky. However, if we look at the latest data of mutual fund assets under management, 60% of the total assets is in liquid and income mutual fund. These are not equity but fixed income mutual funds. Contrary to general opinion, mutual funds manage more fixed income assets than the equities.
Hence, if someone wants to park their money for very short term, they have the option of choosing liquid or money market mutual funds (Have a look here). If you are looking at slightly longer duration, you can take a pick from dynamic bond funds. The key is to decide on what is the right asset allocation for you and then choose the mutual funds that will fulfil your investment objective.
I don’t have too much money to invest, better to do recurring deposit
Many people think that as the amount they can set aside for investment is small, mutual funds are not an option for them. The reality is somewhat different. You can start a systematic investment plan from as low as 500 rupees per month for most mutual fund schemes. This is the beauty of mutual fund. No matter how much you invest, you get the same access to the expertise of the fund manager.
Equity mutual fund is too risky, I don’t want to lose money
Famous economist John Maynard Keynes once said that in the long run we are all dead. The opposite is true about equity mutual funds (longer the time horizon, higher is the chance of success). The key to good investment results from equity mutual funds is to have long-term investment horizon. Furthermore, whether you will suffer losses in equity mutual funds depends on below two factors:
- How you have invested the money in equity funds? Timing the equity market is impossible. To avoid picking bad time to make your investments, we only recommend investing in equity mutual funds through systematic investment plans ( see our video on how to create wealth using SIPs). If you have received large amount, we recommend systematic transfer to equity funds. Have a look at our thoughts on how to use STPs for lump sum investing.
- How long you want to remain invested? Our analysis suggests that if someone stopped his SIP after 12 months, 36% of the time, he/she was on loss. However, the loss probability falls to almost 0% if the duration of SIP is increased to 10 years. If your investment time horizon is less than 5 years, you should not consider equity mutual funds.
Can I lose money due to fraud in mutual funds?
Some investors burnt their fingers in UTI scam. A legitimate concern around risk of fraud does exist. However, the risk of loss due to fraud in mutual fund is almost eliminated. The reason being that the regulator has learnt from past misdeeds of market participants. Regulatory framework is quite strong now. However, if someone promises you the moon, be alert (Five tell-tale signs of a ponzi scheme).
In summary:
- Mutual funds have wide array of options to choose from. Depending on your risk appetite and investment time horizon, you can certainly find a suitable mutual fund.
- Starting mutual fund investments doesn’t require lot of money. You can start from as little as ₹
- If you invest in equity mutual fund in the right manner with appropriate time horizon, you can minimize the risk of loss.
- Tight regulations have almost eliminated the risk of fraud from mutual funds.
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