Myths v/s facts about mutual funds

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Investing in mutual funds can be a great way to provide diversification and stability in your portfolio and build financial security for your future. But it can also be discouraging when misinformation holds you back from taking advantage of this opportunity.

Myths and misbeliefs around mutual funds have the potential to lead to missed opportunities or costly mistakes in investing. Knowing these myths and facts can make all the difference toward making an informed decision on how to best incorporate mutual funds into your portfolio. On that note, here are six myths v/s facts about mutual funds that can help you simplify your investment decisions.

Myth 1: One needs a large sum to invest in mutual funds

It is possible to make regular investments with small sums using systematic investment plans (SIP). SIP offers the convenience and discipline of investing periodically. Additionally, by making regular investments over an extended period, you benefit from rupee cost averaging that removes the factor of market volatility from the equation and rebalances the risk and reward balance.

You can even customise your SIPs according to your risk appetite, budget, and financial goals with an SIP calculator so as to ensure long-term profitability.

Myth 2: Investment in mutual funds is risky

Investing in any type of security carries some risk, but that doesn’t mean you should avoid them altogether. The fact is that mutual funds investments offer more protection from risk than individual stocks because your money is spread across many different investments rather than just one. That means if one investment performs poorly, it won’t affect your overall portfolio as much as it would if you were only invested in a single stock or bond.

Myth 3: You should buy mutual funds when markets are doing well

Market cycles fluctuate over time, so timing your investments is difficult. That said, if you are looking for long-term returns, it is important to make smart choices to reap the benefits regardless of market trends at any given time. The key is to focus on quality rather than timing and look for stocks or bonds with solid fundamentals instead of chasing after short-term gains from volatile investments.

Myth 4: Choosing growth option and dividend payout is the same in all mutual funds

The choice of dividend payout versus growth option depends on your investment objective and personal financial goals. When you choose a dividend option, you are partially cashing in on returns earned by your fund from time to time, as dividends are declared from time to time.

If you select the growth option, however, the earnings aren’t released immediately; instead, they reflect appreciation in the fund’s net asset value (NAV). Dividend payout might be a more suitable choice for investors who require regular payments, while growth option may be preferable for those with a focus on long-term investments.

Myth 5: Invest just once and forget

Mutual funds are not like fixed deposits, where you can invest your money once and forget about it. On the contrary, as a fund investor, you should remain aware of the performance rate, review portfolio allocation regularly, and rebalance assets when required.

Also, over time, the goals of many investors change, which can cause their portfolio objectives to become out of sync with the original investment. So, constant monitoring is necessary to ensure that you maximise returns from the investment. This becomes even more important when market volatility increases due to macroeconomic trends or sector movements.

Myth 6: Mutual fund investments are for long-term goals only

Mutual funds can be used for long-term goals, such as retirement savings or building a nest egg to last a lifetime, but they also serve mid-term and short-term objectives based on one’s investment horizon and goals. There are different types of mutual funds, such as equity, debt, or hybrid funds, that invest in different types of securities suitable for different investor needs.

So, don’t let these myths hold you back from potentially benefiting from mutual funds, and equip yourself with knowledge first! Researching the facts and consulting a financial professional can enable you to make an informed decision based on your goals and risk appetite.

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