6 Common Mutual Fund Myths Busted for Indian Investors

Mutual funds have become a go-to investment option for millions of Indians looking to grow their wealth. Yet, a cloud of myths and misconceptions often holds back potential investors. From believing you need a mountain of cash to start, to thinking it’s all a high-stakes gamble, these myths can be costly.

Today, we’re going to bust six of the most common mutual fund myths with clear facts and simple explanations. Let’s clear the air so you can invest with clarity and confidence.

Myth 1: You need to be rich or an expert to invest in mutual funds.

Fact: Mutual funds are designed for everyone.

This is one of the most persistent myths. The truth is, mutual funds are designed to be accessible. You don’t need to be a financial wizard or have a hefty bank balance to get started.

Thanks to the Systematic Investment Plan (SIP), you can begin your investment journey with as little as ₹500 or even ₹100 per month in some schemes. A SIP allows you to invest a fixed amount at regular intervals, making it incredibly convenient for salaried individuals and new investors. You don’t need a large lump sum to enter the market; you can start small and build your wealth gradually.

Myth 2: “Mutual funds are subject to market risk” means you will lose money.

Fact: Risk means fluctuation, not guaranteed loss.

You’ve heard it in every mutual fund ad: “Mutual fund investments are subject to market risks.” This mandatory disclaimer, required by the Securities and Exchange Board of India (SEBI), is a statement of fact, not a prediction of loss. It simply means the value of your investment can fluctuate based on market conditions.

Here’s how risk is managed:

• Professional Management: Each fund is managed by a professional fund manager and a team of researchers who make informed decisions about where to invest your money.
• Diversification: Mutual funds invest in a basket of securities (like stocks and bonds). If one investment performs poorly, the others can help balance out the portfolio. This is far less risky than putting all your money into a single stock.

While short-term fluctuations are normal, history shows that staying invested for the long term can help investors ride out market volatility and earn inflation-beating returns.

Myth 3: You must time the market to succeed in mutual funds.

Fact: Consistency beats timing.

Trying to “time the market”—buying at the absolute bottom and selling at the peak—is nearly impossible, even for seasoned experts. The good news is, you don’t have to.

The beauty of investing through a SIP is a powerful concept called rupee cost averaging. When the market is down, your fixed SIP amount buys more units of the mutual fund. When the market is up, it buys fewer units. Over time, this averages out your purchase cost and removes the stress of trying to predict market movements. The key to long-term success is disciplined and consistent investing, not market timing.

Myth 4: All mutual funds are the same.

Fact: There’s a mutual fund for every financial goal.

This is like saying all movies are the same. Just as there are different genres of films, there are many types of mutual funds, each designed for different financial goals and risk appetites.

Broadly, they are categorized as:

• Equity Funds: These invest primarily in stocks and are suitable for long-term goals like retirement planning. They have the potential for high returns but also come with higher risk.
• Debt Funds: These invest in fixed-income instruments like government and corporate bonds. They are less risky and are ideal for short-term goals and capital preservation.
• Hybrid Funds: As the name suggests, these invest in a mix of equity and debt, offering a balance between growth and stability.

Within these, there are further sub-types like large-cap, mid-cap, small-cap, and sectoral funds. The key is to choose a fund that aligns with your financial goals and risk tolerance.

Myth 5: Funds with a lower NAV are cheaper and better.

Fact: NAV does not determine a fund’s performance.

This is a classic misconception. A fund’s Net Asset Value (NAV) is simply the market price of one unit of the fund. It does not indicate whether the fund is cheap, expensive, or likely to perform well.

Let’s break it down with an example:

• You invest ₹10,000 in Fund A with an NAV of ₹20. You get 500 units.
• You invest ₹10,000 in Fund B with an NAV of ₹100. You get 100 units.

If both funds grow by 10%, your investment in both will be worth ₹11,000. The absolute NAV is irrelevant; what matters is the percentage return. A fund’s performance depends on the quality of its underlying assets and the fund manager’s expertise, not its NAV.

Myth 6: Dividends from mutual funds are extra profits.

Fact: Dividends are a part of your own investment returns.

Many investors believe that dividends are “free money” or extra profit over and above their capital gains. This is incorrect. When a mutual fund pays a dividend, the dividend amount is deducted from the fund’s NAV.

For example, if a fund’s NAV is ₹50 and it declares a dividend of ₹2 per unit, the NAV will drop to ₹48 after the payout. The dividend is simply a portion of your own returns being given back to you.

Furthermore, as per current tax laws in India, dividends are added to your total income and taxed according to your income tax slab. This can make them less tax-efficient for those in higher tax brackets compared to the growth option of a fund.

Conclusion: Invest with Knowledge, Not Myths

Mutual funds are a powerful tool for wealth creation, but they are often misunderstood. By busting these common myths, you can approach your investment journey with more confidence and make smarter, more informed decisions. Remember, the key to successful investing isn’t about timing the market or chasing low NAVs, but about disciplined, regular investing in funds that align with your long-term financial goals.

This article is for informational purposes only and should not be considered investment advice. Please consult a financial advisor before making any investment decisions.