Investment School: Things to know about mutual funds

Things to know about mutual funds

In a previous article , we have seen about famous investment myths about investments in general. There are also misconceptions about mutual funds prevailing among the investors. Let us dig through them and understand how they are misconceived.

1.Diversified funds invests across all sectors.
             Ideally an investor would expect the fund to be invested in all sectors . However the funds usually have a bias towards large cap or mid cap or small cap. They have significant exposures in one or two sectors as they take sectoral bets. So investor should not go by the label "diversified fund". One should look at the funds past track record and identify what are the funds major bets over the past. So long term funds are a better option than new funds.
2. Mutual fund dividends are same as stock dividends.
               Investors tend to believe that mutual fund's dividends are same as stock dividend. However it is not true. When a mutual fund declares dividend in a scheme, the dividend is deducted from the fund's NAV and it does not come free to investors.
            Eg. A fund with 40 rs nav, when declares a dividend of 3 rs , the nav of the fund reduces to 37.
               So an investor can opt for dividend-yield funds if he intends to generate minimum cash flow from his investment on a regular basis.
3.SIP always scores over lumpsum investing.
               Though it is true that SIP(Systematic Investment Planning) would bring in discipline in investment and would lead to regular contribution, SIP does not beat lumpsum investing in a rising market. The major benefit of SIP - cost averaging does not hold good in a long term rising market. SIP works best when market has upward and downward cycles alternatively.
4. Lower NAV is cheap to buy
          It is advisable to go for a old fund with a good track record rather than buying a new fund offer at a lower NAV. A detailed analysis of this given here.
5.FMP returns are fixed 
              Though the name Fixed Maturity Plan suggests fixed returns, in mutual funds, as per SEBI , no fund can assure the investor of fixed return. Hence even FMP's return can turn negative if the interest rate scenario changes during the tenure or inflation rises during the tenure.
          So as an investor you should know all features of asset class (pro's and cons) before making your investment. So i hope this series of information is educating you in your investment journey.

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