A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds or other securities.
Mutual funds give small or individual investors access to diversified, professionally managed portfolios at a low price.
Mutual funds are divided into several kinds of categories, representing the kinds of securities they invest in, their investment objectives, and the type of returns they seek.
Some common myths about investing in mutual fund:
(1) Investment in mutual fund (MF) is always risky: No, it is not. Mutual fund is not necessarily all about equity or stocks. Mutual funds also deal into debt instruments like Certificate of Deposits (CDs), Bonds, Govt. Securities (G-Sec.), Non-convertible Debentures (NCDs) etc. This means that a mutual fund scheme can also have all or some of these debt instruments in its portfolio. Different debt instruments have different maturity periods. MF schemes which are having debt papers of very small duration are least risky. Such schemes are known liquid MF schemes. These schemes can be as safe and as liquid as your savings bank a/c. Similarly, carefully chosen debt MF schemes can be as safe as fixed deposits along with better tax-adjusted return.
(2) Investment in MF requires demat a/c: No, it does not. Though equity MF scheme does invest into stocks of companies, but you need not to have a demat a/c to hold units of such MF schemes. All you need is to be KYC compliant (i.e. having PAN and valid address proof) and have an active bank account. That’s it. At FundzBazar (check the login section of this site to register or sign-in to trade instantly in mutual fund schemes) you can even invest completely online and instantly that too without having any demat a/c!.
(3) Investment in MF requires timing the market: No, you need not to time the market if you are investing for long term through Systematic Investment Plans (SIP) i.e. investing a small amount at regular intervals for a number of years. If you do that then, your investments will reap the benefit of rupee cost averaging i.e. buying more units when price is low and buying lesser units when price is high by investing same amount every time.
(4) Higher unit value (NAV) means a costly purchase: No, it does not. Let me give you an example. Suppose you asked me, the rate of inflation in last 2 financial years (FY) and I told you that in FY 2013-14 cost inflation index (CII) stood at 939, and in next two FYs CII values were at 1024 and 1081. Does it mean anything to you? No. It would have helped you instead if I had told you that in last two FYs rate of inflation were 5.57% (FY 2015-16) and 9.05% (FY 2014-15). So what matters is percentage of relative change and not the value itself as the base values in cases of both inflation (at 100) and mutual fund NAV (at 10) are assumed for ease of understanding and measurement. So look at yearly growth rate of a scheme’s NAV rather than NAV itself. If it’s consistently beating its benchmark return then it’s worth considering.
(5) Returns from all MF investments is taxed similarly: If in portfolio of a MF scheme, percentage of exposure into equity type of instruments is more than or equal to 65% - such schemes are then known as equity schemes. Similarly, if percentage of exposure into debt type of instruments is more than or equal to 65% - such schemes are then known as debt schemes. Equity schemes and debt schemes are taxed differently. Taxing also depends on how long you hold the investment before you sell. If equity schemes are sold after holding for more than a year – then 10% tax is to be paid over and above of Rs. 1 lakh gain. If debt schemes are held for more than three years then on indexed gain 20% tax is to be paid. If investments are held for shorter-term then short term capital gain tax is to be paid as per one’s tax slab.