There are too many mis-conceptions,which people have about investing in Mutual Funds. Let me clear some of them at least:
1. ‘Are mutual funds not risky’: Mutual funds are just investment vehicles with some underlying assets. So a mutual fund could represent equities, debt, commodities, real estate, etc. Largely mutual funds REDUCE risk of the individual asset class. Thus a bunch of equities is less risky than a single stock. Also in the Indian context about 70% of all assets are invested in debt instruments. This is surely not as volatile. I will talk about risk in a different context.
2. All mutual funds invest in equities? : No. see number 1.
3. If I invest in EQUITY schemes I get tax benefit.? Right!! : Partly right, partly wrong. Only and only if you invest in schemes called “ELSS” do you get a tax benefit under section 80C of the Income tax act.
4. Do I not need a lumpsum, say, at least Rs. 100,000 to invest in a mutual fund? :
Hell no!! You can start with an amount as small as Rs. 500 in most fund houses – and let the amount grow on a monthly basis, it slowly adds up over a long period of time. Infact ICICI Prudential and HDFC mutual funds have a scheme by which you can increase the amount on an automatic basis. This brilliantly lets you accumulate a higher amount of corpus.
5. What happens if I start a SIP and I am not able to pay for one month? :
Literally nothing. Every month you are giving money to a fund manager to manage your money. Not giving in one particular month is not an offence. Largely this comes from the EMI cheque bouncing fear. You should not bounce any SIP cheque, but in a worst case scenario if it does bounce, you will end up paying some bank charges, nothing more than that. No penalties, no court case. Relax.!!
6. You keep saying mutual funds are for the long term, I have only a 3 year view!!
Mutual funds are of many many types. In something called Liquid funds you keep large amounts of money in one shot for a short period of time. On the other hand in equity funds it makes sense to put small amounts of money over a very long period of time.
7. My adviser seems to be cheating me – he suggests only funds with high NAV, never cheap funds!!
An adviser gets paid a %age of the money invested, so for him it should not matter in which fund you invest! It is a myth that funds with lower net asset value (the price that you pay for each unit) are cheaper. They are not cheap at all. The NAV should not bother you at all.
8. I am a businessman I cannot commit to a SIP:
Actually you can do a STP. Put all your money in a liquid fund and do a STP from that fund. Suppose you have Rs. 200,000 now. Put it in a liquid fund and do a STP of Rs. 2000 per month. When ever you have a surplus keep pumping it into that liquid fund. Thus at the end of one year that fund may have say Rs. 300,000 because – it grew in value and you added some amount. However 24,000 has gone into an equity fund. This can be painless for a businessman.
Alternatively you can start a small SIP of say Rs. 2000 per month and whenever you have extra money keep adding to the same account. Unlike a bank RD you can add some ad hoc amount into a SIP account.
There are more myths….but later…!!