5 Most common Mutual Fund Myths: Busted

Mutual Funds are collective investment instruments that are regulated and sold to the general public. They are managed by professional fund managers who invest the fund’s capital and attempt to produce capital gains and income for the fund’s investors.

The main myths about investment in mutual funds are as follows:-

1] There is a lot of documentation required

KYC (Know Your Customer) is just a one-time exercise and the process can be completed through a SEBI- registered intermediary (broker, Depository Participants (DP), mutual fund agency, etc). You need not undergo the same process again while approaching another intermediary. As per the KYC requirement, you need to submit an identity proof, address proof and latest photograph to invest in mutual funds/securities markets. KYC is mandatory to invest in mutual funds. Just like a combo ticket to an entertainment park makes it easy to enjoy all the rides, doing KYC one-time allows you to invest in all mutual funds hassle free.

2] You need a Demat account for Mutual Fund Investments

Mutual Fund investors are free to receive the units either as a physical statement or dematerialised form. Thus, it is not mandatory to have a demat account for investing in mutual funds. If you are a first-time investor in mutual funds, you need to fill up a Know Your Client (KYC) form and submit it along with your application form. You will also have to submit other relevant supporting documents. Once your KYC documents are verified, your investment will be accepted.

3] It is difficult to exit mutual fund investments

Another myth which stops investors from investing in mutual funds is that they think starting SIP for X yrs, is a commitment they can’t break in between and they will face some penalty if they stop their investments. But, the truth is that once the SIP is started, it can be stopped anytime in between. So, don’t worry while starting the SIP for next 5, 10, 15 or 20 yrs. The day you want to stop it, it can be stopped with just one notification.

4] You need a big amount for investing in mutual funds

There is the most common myth. A large section of investors believe that they need a huge amount of money to invest in mutual funds. Where as, in reality it is just the opposite. One can invest as low as Rs. 500 per month via Systematic Investment Plan (SIP) and Rs. 5,000 through lump sum mode. Also, there is no monthly or annual maintenance charge even if you don’t transact further.

 5] Mutual funds are meant for the long term

When someone suggests a mutual fund, the first question asked is whether it is “long-term ” investment. The fact is it’s good if you invest for a very long term as you can reap the benefits of compounding. But, one who needs money sooner can also invest with a view of getting the better return than other asset classes. There are multiple schemes to choose from those suit different types of investors. Mutual funds are useful for every investment purpose, be it short-term, medium term or long term. While Liquid and Short-term Debt funds are suitable for short and medium-term requirements, Equity funds are ideal for long-term needs.

You can also read are article on why mutual funds are better than direct stocks – Why Mutual Funds and Not Direct Stocks?