There are many common myths associated with Mutual funds. Common investors do not apply their thinking a lot of times and agents/sellers of products a lot times are successful in taking advantage of this and cheat them . Lets see some of the common myths associated with mutual funds below .
1. A Mutual fund with low NAV is better than other MF’s with high NAV.
This fallacy is due to the fact that investors perceive the NAV of a mutual fund (MF) as similar to the price of equity shares. Comparison of NAV of MF unit and Share price
NAV = (market value of all the shares held in the portfolio + Cash – Liabilities)/ total number of units
Share Price = combination of company’s fundamentals, demand-supply, public perception about the company + other complicated things
It is Funds Quality , Fundamentals and values that determines your returns and not NAV , its just the “book value” of the unit.
Example : Consider Fund A with NAV Rs 100 and Fund B with NAV Rs 5 . Both has corpus of Rs 10,00,000, Fund A has good fundamentals and is better mutual fund in terms of strategy compared to Fund B. After 1 year say their return is 40% and 30% as expected. So the NAV for A will be 140 and for B will be Rs 6.5 and fund A will give better returns compared to fund B.
The point to understand is its the strategy and the asset allocation which matters. Low NAV can only get you more units and nothing else 🙂
2. Mutual funds with good Past Performance are best choice
This is a common misconception among the Mutual funds investors that funds which have performed very well in past are the best choice . People believe that if a ABC mutual fund has given 60% return in past year and XYZ has given 45% return , then ABC is a definite choice this year also.
They should understand that performance over 1 or 2 years have very little to say about them. They must analyse performance over 4-5 years atleast to understand how a mutual fund has performed.
3. NFO’s give better returns
NFO’s are more risky than the existing mutual funds as they don’t have no track record to compare. There is no advantage with NFO when it comes to investments , they have no extra magic. A NFO must be generally avoided until they have very strong strategy and unique and strong idea.
4. Putting money in lots of mutual funds will help
As a rule of thumb , no one should have more than 5-6 different mutual funds . and even those must be different kind of mutual funds . People buy 20-30 mutual funds and don’t see that all of them are of similar nature and with same kind of strategy. All of them have same kind investment portfolio. They should put money in some limited mutual funds and all should be of different type.
They can buy:
- tax-savers with aggressive strategy
- tax saver with balanced aggressiveness
- 2 sectoral funds
- balanced fund
- Some special fund (like special situation fund)