09/10/2017 9:53 AM IST | Updated 09/10/2017 12:00 PM IST

Debunking Some Key Mutual Fund Myths

9 answers that may help you make sound investment decisions.

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A myth is defined as a widely held, but false, belief or idea. For example cracking knuckles can give you arthritis, or that the full moon can affect human behaviour. Some myths are dumb, some are funny, and some can be truly detrimental. Myths about mutual funds are the third sort and believing them can harm your financial health. Mutual funds are excellent financial products to build long-term wealth, but we need to debunk some popular mutual myths that surround them.

1: Mutual funds are risky

Mutual funds are perceived to be risky because they are associated with the stock markets. But the truth is that mutual funds are of many different types. Debt funds, for example, don't even invest in equities. Small-cap equity funds can be said to be the riskiest of all mutual funds, but even they mitigate the risk by diversifying and taking calculated calls. Hence, mutual funds are not dangerous if you understand the type of fund you are investing in.

2: You need a demat account to invest in mutual funds

You need a demat account to invest or trade in stocks, but you don't need one to invest in mutual funds. To invest in mutual funds, you need to be KYC-compliant, once that is done, you can invest through a fund distributor or through the fund company without a demat account.

3: Lower Net Asset Value (NAV) means a cheaper fund

A lower stock price can mean a cheaper stock, but a lower NAV doesn't mean a cheaper fund. All mutual funds start with a NAV of ₹10. As the fund's AUM grows, the fund's NAV also rises. The NAV is essentially the per unit price of the fund. It should not be a determining factor while choosing a fund.

4: You need a lot of money to invest in mutual funds

As little as ₹500 is enough to start a Systematic Investment Plan (SIP) in a mutual fund. There is often a more considerable lump sum amount required to invest in a mutual fund, but a SIP can be started for a small amount as well.

5: Mutual fund investments take a lot of paperwork

This was true a few years ago, but now, the investment process, including KYC, can be done entirely online. You don't need to go to a fund company or distributor's office to invest in mutual funds anymore. You don't even need to take a print out or sign and courier a form anymore. All of the required paperwork can be finished online in a matter of minutes.

6: SIPs cannot be stopped

Many investors think that if they sign up for a 12-month or 24-month SIP, then they will compulsorily have to fulfil that obligation. But that is not the case. You can stop, pause and restart a SIP whenever you want.

7: The fund company will disappear with my money

The mutual fund industry is regulated by government bodies such as the Securities and Exchange Board of India (SEBI) and the Association of Mutual Funds in India (AMFI). Every mutual fund company is given the license to run mutual funds after due diligence. The money you invest is also safe with a designated trust. The government has taken enough steps to ensure that your investments are safe and no fund company will run away with them.

8: Mutual funds will make you rich overnight

Mutual funds are not a scheme to make a quick buck. Sure, you can see an upside in a short period. But that is not what mutual funds are for. They are best suited to build wealth over a long-term. You shouldn't time the market with mutual funds and invest in them to earn quick returns. The pitfalls of this approach are way more than the rewards.

9: Mutual funds are expensive

Mutual funds cannot charge an expense ratio of more than 2.5% a year. This is an annual fund management fee that is deducted from the investments made in the fund. Most funds don't even touch this threshold of the expense ratio. The expense ratio is typically between 1-1.5%. This is a nominal fee to pay for the expert fund management and research services you receive from the fund company.

The opinions expressed in this post are the personal views of the author. They do not necessarily reflect the views of HuffPost India. Any omissions or errors are the author's and HuffPost India does not assume any liability or responsibility for them.

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