Every month, we receive income from a source and would partially save a part of it as a form of investment or cash savings. Keeping money idle is suggested to be avoided as inflation increases every year by 4-5% and the value of money depreciates. The future is uncertain and to safeguard your finances, it is important to look beyond the ordinary financial tools and explore better options like Mutual Funds.

According to the Association of Mutual Funds in India, the total number of folios as of November 30, 2020, stood at Rs. 9.37 Crore. For a notable time period, many people have been investing in Mutual Funds and others hesitate to do the same because of the myths that go around.

Here are 5 misconceptions that will be debunked about investing in Mutual Funds.

1. A massive amount of capital is required to invest in Mutual Funds

The most common myth among a vast segment of investors is that a large amount of money is required to invest in Mutual Funds to gain higher returns. But, it is actually the reverse. One can invest as low as Rs.100 – Rs.500 per month via a Systematic Investment Plan (SIP) and Rs.5000 in lump-sum mode. As your income increases, you can increase your investment capacity. There is no maintenance charge whatsoever even if you don’t make transactions.

2. One needs to be a genius to invest in Mutual Funds

Mutual Funds are managed professionally by experts who have done the extensive market research to benefit the investor and their AMC. So, investing in Mutual Funds is actually meant for common people who lack the knowledge and expertise in that field. It is also an economical way of having a professional manager who manages your investments smartly. They have the ability to analyze the risk profile and invest in funds that meet your financial goals.

3. A DEMAT account is required to invest in Mutual Funds

 Having a DEMAT account is not imperative to invest in Mutual Funds except in the case of Exchange Traded Funds. It is totally up to the investor whether he wants to hold the units in dematerialized mode or physical accountant statement mode for all schemes. If you are investing in mutual funds for the first time, you have to submit the KYC (Know Your Client) form and application form along with other supporting documents. Once the KYC form is verified and accepted, your investments will be approved.

4. Mutual Fund companies only invest in equity markets

 Mutual Funds invest in various financial tools ranging from equity to debt. In fact, the majority percent of assets under mutual funds belong to debt when compared to equity. In India, the three main categories of Mutual Funds are Equity, Debt, and Hybrid. So, Equity is just one-third of a part of Mutual Funds. Debt instruments include bonds, debentures, certificates of deposits, etc. Hybrid funds are a composition of equity and debt funds. The investors are free to invest in hybrid funds as it is less risky than putting all your money in one place.

Also, investing in mutual funds is not same as investment in direct equity stocks. When one invests in mutual funds, the mutual fund manager in turn makes investments in equity as well as debt instruments based on a detailed study with an objective to achieve the desired return. On the other hand, investment in direct equity stocks can be done via a registered broker in lieu of specific brokerage, but there would be lack of market study and experience of the fund manager.

5. Mutual Funds are on only long-term investments

 It is advisable to invest in mutual funds for a longer duration as it benefits you by compounding. But it is not true that short-term investment is not an option. There are various short-term funds that cater to the investor’s needs instead of parking them in a bank account or FD’s.

Some of the following are:

  • Liquid Funds are short term funds with a portfolio maturity of fewer than 91 days.
  • Ultra-Short-Term Bonds are medium duration funds with a portfolio maturity of 1-3 years.
  • Long-Term Income Funds are medium to long term funds with a portfolio maturity of 3-10 years.

While Debt Mutual Schemes are suitable for a shorter duration, Equity Mutual Schemes are suitable for a longer duration.  So, it is totally up to the investor if he wants to invest in Mutual Funds for a few weeks, months, or years!

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