In this article, we will discuss the 4 common myths about Mutual funds investment that is popular among the investors. Mutual funds provide a good investment opportunity for different types of investors based on the financial goal of the invest. There are different types of Mutual funds depending on the types of investor and the investment objective of the Individual.
As mutual funds are invested by those investors who have no time to observe and understand the market and won’t spend much time on the market. Hence there is an important urgency to keep these myths aside in order to clearly understand what mutual funds are.
1. Past Performance represents future
#1 in 4 Common myths about Mutual funds
Investors select the mutual funds based on the returns that those mutual funds have given in the past and they take it for granted that those funds will surely give the same good returns in the coming future also. This is not true always. If you observe the top funds which gave good returns every year for the past few years you will observe that the funds which have given good returns in the year will keep on changing for every financial year. this means that the same fund will not give the same good returns every year.
Though past performance of a mutual fund is the one criteria on which the funds for investment need to be selected, it should not be the sole criteria for investing in the mutual funds. For example, there can be a sudden change in the fund manager and hence there can be the change in the returns as it is the fund manager who should be experienced and qualified enough to make good decisions which give good returns. Hence investor should observe other criteria of the Mutual funds and not just select the fund based on just the past performance.
2. NFO’s give better returns
#2 in 4 Common myths about Mutual funds
NFO stand for New fund offering. New fund offer means that there is a new Mutual fund that is about to begin and is open for subscription from the investors. Most of the times the investor take it for granted that the NFO is the best time to get the fund at a cheap NAV. But this is not true. sometime after buying the fund from NFO, the fund NAV may move down giving the investors loses. Hence you must understand about the fund before subscribing just because there is a new NFO.
3. low NAV is better than high NAV.
#3 in 4 Common myths about Mutual funds
When investing in mutual funds new investors will observe one important thing without thinking much about that It is the number of units of the Mutual fund the investor is getting for the amount he is investing. And the end he ends up selecting that particular fund which is giving a large number of units of MF with less fund. A mutual fund which gives large units with less amount means that the fund with Low NAV is selected based on all the funds observed by the investor. He believes that the fund with low Nav is best than the fund with High NAV as he is getting a large number of units of the mutual fund.
But this should not be the method for investing in mutual funds. There is not much role for an individual to worry about the Units of the Mutual fund he is receiving as long as he is getting consistent returns. The mutual fund with High NAV will move by large points and the Mutual fund with low NAV will move small points and at the end Both the Mutual fund may end up almost the same returns.
4. Putting money in lots of mutual funds will help
#4 in 4 Common myths about Mutual funds
As a rule of thumb, no one should have more than 5-6 different mutual funds. and even those must be a different kind of mutual funds. People buy 20-30 mutual funds and don’t see that all of them are of similar nature and with the same kind of strategy. All of them have the same kind of investment portfolio. They should put money in some limited mutual funds and all should be of a different type.