Myths About Mutual Funds (For Beginners)

February 06 , 2013

Myth 1: A higher NAV indicates a better fund, or, a lower NAV indicates a cheaper fund.

Fact: NAV per se does NOT tell you anything about a fund's performance. Instead, it is the change in NAV over a time period (i.e. the returns) that you should be measuring. While doing this, make sure you annualize the returns, so that they are comparable. Selling a Rs10 NAV NFO as a 'cheap' one was a common fraud perpetrated by agents till the regulator cracked down on them.

Myth 2: An NFO is an interesting product to be tried out, if I have some money to spare

Fact: An NFO is a fund with no track record. Instead, opt for an index fund, or a good fund with a minimum 3-year track record. The only person the NFO is good for is the broker, since commissions on NFOs tend to be higher.

Myth 3: I should not put all my money into one fund. I should hold a diverse basket

Fact: This is true of stocks, not of funds. A mutual fund already does the diversification for you, by holding several stocks (as many as 25 usually). You can little additional benefit by diversifying into several funds. In fact, you risk making your portfolio fragmented and difficult to manage. In case of index funds, just one is sufficient. In case of other funds, about three should do the job.

Myth 4: I should analyse and review my fund portfolio every year

Fact: This is not necessary, and is counterproductive in general. Do not exit a fund till you need money for your important goals. Do not churn a portfolio unless you are an expert investor (in most cases, not even then!) Brokers and Wealth Managers often recommend a portfolio review - but this is only so that they can churn and make money from the transactions. This has nothing to do with improving the returns prospects of your portfolio. Remember, more action is not always better than less action. In many cases, it can be worse!

Myth 5: By opting for Dividend option, I manage my risk

Fact: Dividend or Growth options have nothing to do with your risk. If you are a pensioner living off your fund's income, go for the Dividend option. Else, always go for the Growth option and let the money grow in the fund. If you receive it as Dividend, you are likely to spend it in consumption items.

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