Mutual Fund Mis-facts

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Over the years mutual funds, with their varied offerings, have been instrumental in helping investors achieve their financial goals. However, mutual funds have also often found themselves surrounded by certain myths based on flawed beliefs and incorrect information. It is important for investors to be aware of these myths and not be influenced by them. This article is aimed at making investors aware of some prevalent mutual fund myths.

Long-term investing always pays

The importance of a longterm investment horizon while investing in equities/ equity-oriented funds cannot be overstated. But does this mean that investing in an equity-oriented fund over the long haul in isolation is good enough? Also, can there be a flip side to such an approach, that is, can long-term investing ever be counter-productive?

 

The answer is yes!

Consider the case of a fund which is inherently flawed, where the investor made a bad investment decision. Simply staying invested for the long term won’t turn the fund into a better one. The passage of time won’t eliminate a fund’s shortcomings. Moreover, staying invested for the long-haul could keep the investor from achieving his goals. Then there are funds (like sector funds, for instance) with a narrow investment universe that tend to deliver, at their best, over the short term when the underlying sector hits a purple patch. Over longer time frames, they may or may not deliver desirable results.
Hence, it should be understood that the long-term horizon in isolation doesn’t add up to much.

Debt Mutaul Funds are risk free

Since debt funds have traditionally been considered as low-risk investment avenues, the focus on their risk aspects tends to be lower. And then there are myths that make matters worse for investors. For instance, investors are known to believe that returns from a liquid fund or a government bond fund can never be negative. Let’s debunk this myth with the help of a real-life instance of recent origin.

The year 2013 saw the Indian rupee depreciating to record levels. This prompted the RBI to take measures to bolster the rupee. Some of those measures were instituted by the central bank on July 15, 2013. While these measures were aimed at deterring speculation on the rupee, they had a rather negative impact on debt markets and subsequently debt funds.

As seen in the table here, a day after the RBI announced the measures, all debt fund categories registered a sharp fall in returns.

Investors, on their part, should do well to understand that debt funds, like equity funds, are market-linked instruments. Hence, there is no guarantee of either returns or capital preservation.

Systematic investment plans (SIPs) always works

An SIP is the most recommended mode of investing in mutual funds. It entails investing a small sum every month vis-à-vis investing a lump sum. The advantage with SIP is that it enforces discipline in investing, which for an investor may be difficult to adopt in a normal course. Despite the obvious benefits, it is a myth that investments via the SIP route always deliver higher returns vis-à-vis lump sum investing.

SIP works on the philosophy of rupee-cost averaging. This means that the money invested will buy more mutual fund units when its net asset value (NAV) is low and fewer units when its NAV is high, thereby lowering the average cost per unit over time. This strategy would typically work best during times of market volatility.

But if equity markets experience a secular bull run, the returns from SIP investing may lag vis-à-vis lump sum investing. Such an occurrence is not entirely uncommon over shorter time frames. So, to benefit from SIP investing, investors should have a longer investment horizon spanning at least a market cycle since, over the short term, markets could witness a unidirectional upward movement.

 

 

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