The mutual fund industry owes me some thanks for pushing a lot of people into investing! Surely the investors are happy and benefiting and hence enjoying the process. However when I speak to them I realize that there are too many mis-conceptions, let me clear some of them at least:

1. ‘Are mutual funds not risky’:

Answer: Mutual funds are just investment vehicles with some underlying assets. So a mutual fund could represent equities, debt, commodities, real estate, etc. Largely mutual funds REDUCE risk of the individual asset class. Thus a bunch of equities is less risky than a single stock. Also in the Indian context about 70% of all assets are invested in debt instruments. This is surely not as volatile. I  will talk about risk in a different context.

2. All mutual funds invest in equities?

A: No. see answer number 1.

3. If I invest in EQUITY schemes I get tax benefit.

Answer: Partly right, partly wrong. Only and only if you invest in schemes called ‘ELSS” do you get a tax benefit under section 80C of the Income tax act. However, if you invest in any equity oriented mutual fund (i.e. a fund corpus having at least 65% in equities).

4. Do I not need a lumpsum, say, at least Rs. 100,000 to invest in a mutual fund?

A: Hell no!! You can start with an amount as small as Rs. 500 in most fund houses – and let the amount grow on a monthly basis, it slowly adds up over a long period of time. IN fact Icici Prudential and Hdfc mutual funds have a scheme by which you can increase the amount on an automatic basis. This brilliantly lets you accumulate a higher amount of corpus.

5. What happens if I start a SIP and am not able to pay for one month?

Ans: Literally nothing. Every month you are giving money to a fund manager to manage your money. Not giving in one particular month is not an offence. Largely this comes from the EMI cheque bouncing fear. You should not bounce any SIP cheque, but in a worst case scenario if it does bounce, you will end up paying some bank charges, nothing more than that. No penalties, no court case. Relax.

6. You keep saying mutual funds are for the long term, I have only a 3 year view!

Ans: Mutual funds are of many many types. In something called Liquid funds you keep large amounts of money in one shot for a short period of time. On the other hand in equity funds it makes sense to put small amounts of money over a very long period of time.

7. My adviser seems to be cheating me – he suggests only funds with high NAV, never cheap funds!

Ans: An adviser gets paid a %age of the money invested, so for him it should not matter in which fund you invest! It is a myth that funds with lower net asset value (the price that you pay for each unit) are cheaper. They are not cheap at all. The NaV should not bother you at all.

8. I am a businessman I cannot commit to a SIP:

Ans: Actually you can do a STP. Put all your money in a liquid fund and do a STP from that fund. Suppose you have Rs. 200,000 now. Put it in a liquid fund and do a STP of Rs. 2000 per month. When ever you have a surplus keep pumping it into that liquid fund. Thus at the end of one year that fund may have say Rs. 300,000 because – it grew in value and you added some amount. However 24,000 has gone into an equity fund. This can be painless for a businessman.

 

Alternatively you can start a small SIP of say Rs. 2000 per month and whenever you have extra money keep ADDING TO THE SAME ACCOUNT. Unlike a bank RD you can add some ad hoc amount into a SIP account.

There are more myths….but later…!!

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  1. Sir,
    Point number 3 is not complete.
    However, if you invest in any equity oriented mutual fund (i.e. a fund corpus having at least 65% in equities).

    “The proceeds from the investment (when sold) will be tax free, if the investment period is more than a year. i.e. Long Term Capital Gains is Nil”

  2. sir i have 30 lakhs i want to put 10 lakhs in liquid fund and do stp monthly like what you said

    but i am confused regarding tax.
    sir can you write more on this and tell me what all tax problems will come and how to avoid.

  3. Dear sir,
    All the funds are fixed the additional investment is 5000.if one time we invest the additional amount, then 1000 Rs additional investment is possible or not sir. Pls explain.

  4. Sir, I am house wife, but read your articles daily, very informative and very simple to understand, i have query
    If I invest in one mutual fund through Sip for 10 years, I have to monitor the sip for performance, or just keep forfor 10yrs doing guregularly for good return like fd
    thanks

  5. Dear Subra Sir and other readers:

    I have a question regarding Direct mutual funds. Whoever can answer please do.

    Say i have a SIP of 50k in a fund (Regular Growth Plan) and have accumulated a corpus of 10L till now. If i switch my SIP to Direct plan through the given switch form, my whole corpus along with future Sips will be moved to the direct plan?

    In other words say the fund returns 12% this year under regular plan and 12.5% under direct plan, After the switch will i get 0.5% more on the whole corpus? That translates to additional benefit of 10L x 0.5% = 50k? and every year on will i get the direct returns on the whole corpus?

    I want to understand before i switch all my funds. Thanks.

  6. Answer to Mr. Arihant:

    Dear Mr. Arihant,
    Whatever you have already invested will not get the 0.5% or 50k benefit if you switch to Direct now. But going forward the benefit will start accruing from the point of switch including the 10L that you have already accumulated.
    That said please make the switch to direct only if you are confident of managing your money yourself and you spend time researching MFs regularly (Mr. Subra has written a blog on this).

  7. Dear Sendhil:

    Thank you so much for your response. Yes, just to clarify i meant tht if i switch now and next year the return in the direct fund is 0.5% more, then the benefit will be on the whole corpus and not just that years SIP, right?

    Thanks.

  8. Hi,

    I always read that “mutual fund subject to market risk read documents carefully before invest” but which document we need to read as a layman I do not anything about how share market works then how I will figured out which mutual fund is good or not.

    Right now I invested in mutual funds but still I do not understand what is my risk ratio means suppose I invest 5000 in mutual fund how much amount of risk is there any limit.

  9. Dear Mr.Lakshminarasimm

    Investing in liquid funds and doing an STP to equity funds is done in order to reduce the risk of too much exposure to equities, as timing the market would be difficult. Tax implication is that the capital gains will be treated as Short term in 1st year(base slab) and Long term in 2nd year(10%without indexing). Dont bother much about it start doing stp.

  10. Dear Mr.Prasad

    Just start with an advisor atleast initially while doing investments. And keep updating your knowledge before you invest on your own. Or otherwise do investment with 2-5% of your monthly earnings with your own research till understand the concepts.

  11. Hello Hemkumar,
    Thank you for your time in writing down the myth of mutual funds. I am of the belief that mutual funds when invested in long run generate lot of wealth.
    Here is an article about mutual funds vs real estate where in a flat of Rs 1.72 Cr can be bought in 8 years while investing the down payment and EMI in Mutual Funds
    I hope this would be a good article for your blog readers

  12. I have an investment in a particular mutual fund and if due to a market crash, the other investors in the mutual fund withdraw heavily from the mutual fund in which I am invested, will the performance of the mutual fund be affected in anyway because of this?

    So from this perspective is it better to invest directly in stocks individually instead of investing via mutual funds?

  13. company has an asset! this asset has equity part(the original owner part) and liability part(the loan )! the owner sells the small part of equity into million pieces as shares! these pieces are again broken down into 10 million pieces called “mutual funds!” and you are buying that tiny pieces in a long long run of 10 years! by “SIP ROUTE! BY THAT TIME THE ENTIRE ” MODEL” WOULD BE GONE! YOU WILL BE LEFT WITH MINUS 30% RETURNS! AND LOTS OF “TAXES” AND LOSSES! 85% OF mutual funds or stocks ! dont give positive returns! forget about taxes! your “brain” should look at “stocks” the mutual fund is holding! you need to invest “time” no other way! remove taxes from your “brain”!

  14. SIP is not completely flawless!
    Kodak was the world leader in camera film business!
    later cameras had a digital revolution! and nobody brought “films”
    you are tied up to a “SIP” to “Kodak”
    at end of 10 years! you will be getting “negative” returns!
    85% of shares and “mutual funds” give negative returns!
    surendra
    forget about taxes!

  15. one man-one stock! for “common man or woman ” learning and investing directly into “1 ” “stock” is enough!

    i cant understand! why common man should go to extensive complicated “SIP”, MUTUAL FUND ” ROUTE

    IF YOU ARE A COMMON MAN YOU MUST HAVE “TIME” BY DEFAULT

    IF YOU DONT HAVE TIME THAT MEANS YOU ARE NOT A “COMMON MAN!”

    SURENDRA

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