Myths Of Mutual Funds
Myths and misconceptions of investing in Mutual Funds
There are few myths and misconceptions associated with investing in mutual fund schemes. Some of these notions have faded over time, as investor awareness has increased and it is imperative to dispel these myths as investments should not be made under wrong understanding or impressions.
Lower NAV is cheaper :
The most common myth that is prevalent among mutual fund investors is that of associating a scheme with a lower NAV being a better buy compared to a scheme with a higher NAV. This stems from the mind set of equating mutual fund units with equity shares of a company. NAV of a scheme is irrelevant and irrespective of whether we are investing into a fund having a low NAV or a fund with a higher NAV, the amount of investment remains the same.
Let’s look at a hypothetical investment into two schemes A and B. Scheme A has a NAV of Rs 10 whereas scheme B has a NAV of Rs 200. We made equal amount of investment of Rs. 1 lakh each in both the schemes. Scheme A would come across as a cheaper buy because we got 10,000 units as against 500 units in scheme B. Now, let us assume that both the scheme returns 10 % in a month. The NAV for scheme A is Rs 11 and Scheme B has a NAV of Rs 220. The value of your investment in both the case is Rs 1,10,000. Therefore, we see that the NAV of a scheme is irrelevant, as far as generating returns is concerned. The only difference being in case of the former, the investor gets more units and in the latter, he gets lesser units. For two schemes with identical portfolio and other things remaining constant, the difference in NAV will hardly matter and both the schemes will grow at the same rate.
Regular dividends means good performance :
Another popular myth which emerges due to the linkages we make between the concepts of a stock markets and mutual funds is the dividend payout mechanism. When a company pays dividend, in effect it is transferring a certain portion of its surplus to its shareholders. Therefore, a generous dividend payout policy could be considered favourable in case of a company. However, in case of mutual funds, dividends are declared out of the distributable surplus which is included in calculation of net asset value. In effect it is paying back a certain portion of net assets from our own investments. Therefore, dividends from mutual fund units don’t make us any richer, as there are no additional gains to be made. The NAV of the scheme falls to the extent of the dividend payout, when a scheme pays dividend. Thus, a scheme with a high dividend payout record does not necessarily mean that it is performing well.
Demat account is required for MF investments :
Except in case of schemes which are listed on the Stock Exchange and are available on their platforms for buying and selling, demat account is not required to own units in a mutual fund scheme.
Past performers are the best funds to buy :
Despite the disclaimers, mutual fund investors tend to invest in the top performing scheme of the last year, hoping that past performance will ensure that the scheme continues to stay at the top. Therefore, instead of chasing the top performer in the short term, it is advisable to invest in a scheme which features in the top quartile consistently over a longer period of time. In addition to past performance, the investors should also consider other factors viz. professional management, service standards etc.
