Myths about Mutual Funds

let’s shatter the myths about Mutual Funds. it’s time to look at the facts!

MYTH 1 : MUTUAL FUNDS ARE FOR EXPERTS, ONES NEED TO KNOW A LOT OF TERMINOLOGIES TO INVEST IN MF’S, SO NOT SUITABLE FOR BEGINNERS

Fact: Part of the fear of Mutual Funds is that everything will go above your head and that only experts in finance can understand how they work. The structure to the funds are easy enough to understand and the main terminology you need to understand is just NAV (Net Asset Value). Low risk, access to expertise of fund managers, and the option of buying units in a slow and steady manner makes mutual funds investment ideal for first-time investors.

MYTH  2:  MUTUAL  FUNDS INVEST IN EQUITY SHARE MARKET ONLY     

Fact: People usually associate Mutual Funds with Equity Funds, but this is not entirely true. Mutual Funds invest in a variety of instruments ranging from equity to debt. Within debt they may invest in debt instruments that mature in a day (also known as Money Market Instruments) to those that mature in 1 or even 10 years.

MYTH 3: MUTUAL FUNDS ARE VERY NEW IN THE FINANCIAL MARKET.

The idea of pooling capital for investment purposes has been around for a very long time. To look at how mutual funds first began, we need to go all the way back to 1774. However it was in the 20th century which saw a flurry of mutual fund activity. Internationally there are more than 14,000 mutual funds available to investors today. Nepalese mutual fund history dates back to the year B.S. 2050 , when NIDC capital market first issued an open Ended fund. Then and now we have witnessed 6Mutual Fund schemes floated in the market.

MYTH 4: A SCHEME THAT PAYS DIVIDEND IS BETTER THAN A SCHEME THAT DOESN’T

This is completely untrue. Stock Dividend and Mutual funds dividend are completely different. When a Mutual fund announces dividend, the NAV is adjusted accordingly.

Under the dividend payout option, a part of the profits made by the scheme are distributed to investors. The dividend is actually stripped from the NAV of the scheme and accordingly the NAV drops to the extent of dividend and dividend distribution tax paid. For Example Consider a scheme with Current NAV of Rs. 50.Dividend announced is 100%. Dividend is always calculated on the face value and not the NAV value. So the dividend per unit will be Rs. 10. Post dividend the NAV is reduced to Rs. 40.A fund that pays dividend is no better or worse than a fund that doesn’t pay dividends.

MYTH 5: MUTUAL FUND INVESTING IS “HANDS OFF”

Fact: Even for a passive investor, they would be doing themselves a huge disservice not to regularly check their portfolio and see whether or not their mutual funds are performing according to their objective.