5 Myths On Mutual Fund investments

Posted On Monday, Nov 17, 2014


Myth by definition is a widely held but false belief or idea. Unfortunately believing in a myth can sometimes cost you (literally), especially when it comes to your investments. Therefore, it becomes very important for an investor, to be well informed about your mutual fund investments and not to believe in the so called investment myths that will act as a hurdle to achieve your investment goals without any hassles.

Some of the common myths that we generally come across during or before making our mutual fund investments are:

Myth: Big fund means big returns and small risks
Fact: The size of a fund is no indicator of returns or risks

There is a misconception among many investors besides sometimes even the Regulator that size of a mutual fund matters. I believe that this is not based in reality. Here’s a simple logic - all mutual funds invest in the stock markets, so they are all equally safe or unsafe. As long as the markets are open, even a small fund can return your money. We would urge you to look at the track record of the fund house, and the process they have in place to ascertain the risk you are taking.

Investing in a mutual fund is not about having the largest portfolio; it’s about having the best performing one. Investors assume that larger schemes stand a better chance of performing than smaller ones. However, I believe that the size of a scheme has nothing to do with its performance. Moreover, there is also a large possibility that the quality of the fund’s portfolio might deteriorate with size. If a fund is small and has manageable assets, the fund manager has a specific universe of stocks that he can deploy into. However, with an increase in AUM size, the amount of assets that can be deployed increases, while the universe of stocks remains pretty much the same, hence prompting the manager to expand his universe and admit in stocks that he would avoid otherwise.

However, I would like to reiterate that the size of a fund is not a real indicator of performance. A big fund could have the same potential to deliver risk-adjusted returns that a small fund does.

Myth: It’s easy to make money on a daily basis in the stock market
Fact: If you don’t plan for the long term, you could well lose

Daily trading on stock market is a speculative business and needs a lot of research and financial expertise to time the market correctly. Not everyone is blessed with these abilities and therefore others could face a high probability of making losses, thereby risking their savings. I don’t advocate speculation. I firmly believe in long term investments and one should invest in a Fund that in the normal course follow an investment process that invests in strong businesses run by sound management teams, so that your savings can be nurtured and strive to deliver good returns for your savings in the long run.

Therefore instead of chasing the “hot tips” in the market, investors need to consider the long term investment philosophy, style of investing, and more importantly the track record of the fund house before investing in a mutual fund.

Myth: One needs to have a huge lump sum to invest in a mutual fund
Fact: You can start your investment in mutual fund with as less as Rs. 500

There is fear among investors that they need huge lump sum amount to invest in Mutual Fund scheme. This is not the truth. Any investor can start his or her investment in mutual fund with as less as Rs. 500. Mutual funds encourage you as an investor to have a disciplined approach towards your investing. A small but regular investment pattern also known as Systematic Investment Plans (SIP) helps you regularly invest in small amounts as small as Rs.100/-.

Myth: A fund with a lower NAV or NFO at face value is better than a fund with a higher NAV.
Fact: Focus of the investor should be on the composition of the portfolio not on the NAV.

You cannot view a mutual fund unit like a share.

Let's say you want to invest Rs 5,000. Irrespective of which fund you invest in, this amount stays constant.

Now let's say that your choice is restricted between two funds with currently identical portfolios. Since they both currently have identical portfolios, their value will increase in the same proportion. You may buy the units of one fund at a higher price than the other. But, the percentage increase would be the same.

Hence, your investment of Rs 5,000 will increase by the same percentage, irrespective of the fund you invest in.

So the number of units you get, or a high or low NAV are irrelevant. It is the stocks in the portfolio that determine the returns from a fund.

High or low NAV will not affect the redemption value, what matters is the rate of growth

Fund AFund B
NAV (Rs.)2075
Amount invested (Rs.)10001000
Units allotted5013.333
During the same period S & P BSE Sensex rose to 50%
Assuming funds delivered same returns50%50%
NAV grows to (Rs.)30112.5
Units available for redemption5013.333
Redemption value (Rs.)15001500

Myth: Liquid Funds with daily dividends investments always give a NAV closer to face value
Fact: liquid funds are not risk free.

No market-related investment is risk free, be it equity or liquid. While liquid funds are not as perilous as equity funds or long term debt funds, they are not without their share of risks.

For instance, in July 2013, when the rupee witnessed sudden fall against the dollar, RBI in order to curb the fall took some aggressive measures which resulted in the plunge of NAV of liquid funds. This was a one-off event that did not last long. But investors should take heed that such instances can occur, since a Mutual Fund is a pass through medium and AMC’s do not provide an implicit guarantee of a constant NAV.

Therefore, I would like to conclude by saying that, yes, investors need to do their homework before investing in mutual fund schemes but also make sure that their homework is not based on myths. These myths will only mislead you and eventually make you lose your hard earned money. As investors it is important to understand that mutual funds are just a pass through vehicle, which means that the fund acts as a conduit of money from investors, which is then deployed into various markets, the profits and/or losses arising from this are that of the investors alone.

*Source- Bloomberg

Disclaimer, Statutory Details & Risk Factors:
The views expressed here in this article are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.

Above article is authored by Quantum.

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