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(Precious) Words of Wisdom : "Only those who are asleep make no mistakes." ~ Ingvar Kamprad

Shocking mistakes mutual fund investors often commit

The history of Mutual Funds in India is now more than two decades old.

For aam investors, mutual funds are one of the best investments available... in all respects i.e. returns, risk management, liquidity, flexibility and tax efficiency.

Despite this, mutual funds remain one of the least understood financial products. I find this very... very... agonizing.

Listed below are various perceptions that many mutual fund investors erroneously believe in.


1. Mutual fund means investing in equity shares. Wrong.


Equity-oriented mutual funds form just one category. Besides them, you will also find excellent debt-oriented and gold-oriented funds, that have absolutely no relation whatsoever to the stock markets.


2. Low NAV fund is cheaper. Wrong.


It is totally incorrect to think that "low" NAV (Net Asset Value) mutual fund is "cheaper" and hence "better" than a high NAV fund. NAV has absolutely no relation whatsoever to the performance of the fund.


3. Dividends make the funds more attractive. Wrong.


You would be shocked to know that in MFs there is no such thing as "dividend". What the industry terms as 'divided' is merely the distribution of a part of your corpus. Dividend has absolutely no relation whatsoever to making a fund either attractive or avoidable.


4. New Fund Offers are superior to existing schemes. Wrong.


The age of the fund... whether new-born or say 20-years old... is immaterial, irrelevant and inconsequential. Age has absolutely no relation whatsoever to the gains that a mutual fund scheme would generate for you.


5. Top-ranking funds are an ideal choice. Wrong.


Of course, past performance is not totally unimportant. It does matter. But the exaggerated faith in past performance can often prove treacherous. As I had once discussed, in 'certain specific' circumstances even the worst-ranked funds would deliver the best profits.


6. MFs are primarily for the moneyed class. Wrong.


On the contrary, MFs are an ideal option for the common not-so-rich people who have very little surplus to invest. You can start investing in a mutual fund with a mere Rs.500. More importantly ALL investors in a particular scheme... whether investing Rs.500 or Rs.5 crores... will earn the SAME percentage profits. Your quantum of investment has no relation whatsoever to your returns.


7. Mutual funds are risky. Wrong.


Equity funds are definitely lot safer than investing in stocks directly. Debt funds are definitely lot safer than company FDs, NCDs, bonds or debentures. Further, they are almost as safe as Bank FDs, post-office schemes, etc. (+ lot more tax efficient). Gold funds are definitely a lot better than buying jewellery.

In short...
... there is EVERYTHING RIGHT about investing in the mutual funds
... there is EVERYTHING WRONG about understanding of the mutual funds.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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