It will not be an understatement to say that mutual fund myths are as old as the existence of funds. Though experts have tried to debunk them, they have surfaced repeatedly. Unfortunately, along with retail investors, even corporates have fallen for them, thereby robbing themselves of leveraging the potential of this asset class to the fullest and generating wealth. So, what are the four most crucial mutual fund myths that you should steer clear of as a business owner? Let’s find out.
Myth 1: Funds With Lower NAV Are Better
Fact: When it comes to mutual fund investments, there’s an inherent belief that funds with a lower net asset value or NAV are better than funds with higher NAVs. This stems from the fact that we get attracted to things in the lower price band in all walks of life. However, this is not true in the case of mutual funds. In fact, NAV has got little to do with fund choice.
Let’s understand it with an example. Suppose you invest ₹50,000 in fund A and get 500 units allotted at a NAV of 100. You invest another ₹50,000 in fund B and are allotted 250 units at a NAV of 200. While the number of units and the NAV varies, the initial investment remains the same. If fund A’s NAV increases to 110 and fund B’ to 220, the gain in both cases is 10%, and the value of your investment becomes ₹55,000.
So, NAV doesn’t matter or rather shouldn’t be the parameter of choice while zeroing in on mutual fund options.
Myth 2: Only Equity Funds Can Give Decent Returns
Fact: For long, it has been propagated that only equity funds can give decent returns and not debt. However, things have started to change with a rise in US and India’s 10-year bond yield, debt has evolved as a reasonable alternative to equities. If inflation can be tamed, that will make bonds further attractive.
In a nutshell, it’s not that business money investment in equity funds can only help you create wealth. Parking money, even in debt funds, can help you make decent profits. Also, investing in debt funds protects gains made over the years from eroding due to market volatility.
Myth 3: Mutual Funds Are Meant For Long-term Investments
Fact: Not necessarily. Yes, most investments in mutual funds are made to accumulate a corpus for long-term goals, they don’t need to be meant solely for this purpose. You can also invest in them to accomplish short-term objectives like building an emergency fund, getting better returns than fixed deposits, beefing up working capital, etc.
For these goals, you can invest in various debt funds, such as liquid funds, low-duration funds, and medium to long-duration funds, among others. The underlying securities of these funds mature within 3 months to 6 months to a year, which makes them relatively safe from credit and interest rate risk.
Myth 4: You Need a Lot of Surpluses to Invest in Mutual Funds
Fact: No, absolutely not. You don’t need a lot of surplus to invest in mutual funds. In fact, as a corporate, you can invest the idle cash of your business in mutual funds. Typically, most organisations have 10 to 15 days when there are no major business expenses, and the money earns no returns as it’s kept in the current account.
However, if this money is invested in mutual funds like overnight funds, there’s a chance to earn decent returns. Overnight funds invest in securities maturing in 1 day which makes them pretty safe from interest rate and credit rate risks. In fact, overnight funds are considered the safest bet as there are minimal or almost nil chances of suffering losses due to adverse movement of interest rate cycles.
The Final Word
Mutual funds are one of the most flexible financial instruments to help you achieve diverse business goals. Keeping these mutual fund myths at bay can help business owners amplify profits, achieve diversification and be on their path to success.
Disclaimer: Mutual fund investments are subject to market risks, please read all scheme-related documents carefully
The content of this blog is not intended to serve any professional advice or guidance and Shootih takes no responsibility or liability in whatsoever manner for any investment decisions made by the readers of this blog or other blogs. Readers should seek independent professional advice before making any investment decision based on the information provided on this website.
