Mutual funds are risky
This is the common misconception many investors have about mutual funds. They believe that they should invest in mutual funds only if they can afford to take a lot of risk. Sure, even the safest mutual funds have some element of risk. For example, overnight funds which invest in papers of one-day duration also have some risk. The other end of the spectrum is sectoral funds that are extremely risky and volatile. In between these two, there are a host of investment options with varying degrees of risk and reward. You may choose an option that matches your risk profile and goals. Mutual funds are about stocks
Sure, some mutual funds invest mostly in stocks. However, there are also mutual funds that invest in debt instruments. As said earlier, it is all about your goals and risk-taking capabilities that determine your investment choices. For example, if you don’t want to invest in stocks, you can choose a mutual fund scheme that invests in debt instruments. Such schemes are called debt schemes. Sure, some schemes invest mostly in stocks. They are called equity funds. There are many categories of equity funds. They all don’t have similar risk profiles. Some have lower risks than others. For example, large cap mutual funds that are recommended to conservative equity investors are relatively safe and less volatile. On the other hand, small cap schemes can be extremely risky and volatile. That is why they are recommended only to aggressive investors.
They are very complicated
It may sound like a relationship situation, but mutual funds may also sound very complicated to new investors. However, you encounter such situations every day when you do something new. Every new activity appears daunting initially but you find your way in some time. And you become good at it in some period of time. The same is the case with mutual funds. If you are totally new to investing in mutual funds, all you need to do is to hire a mutual fund advisor or financial planner based on your requirements.
Mutual funds need a large investment
Another common misconception among new entrants is that they need a large amount to start investing and to create wealth. Did you know that you can start investing Rs 100 every month in mutual funds? Or you can start investing Rs 1,000? You are just using these reasons to avoid committing yourself to an investment plan. Many new investors often keep postponing their investments by offering this reason. Start investing yesterday, say mutual fund investors. They say time is very important to create wealth. And investing a small amount regularly irrespective of market conditions is the best and only proven method to create wealth over a long period.Mutual funds are like winning a jackpot
Don’t fall for such crazy notions peddled by some so-called successful investors. Remember, you are investing in mutual funds regularly to achieve your goals, not to impress others by making quick gains. Debt funds offer mostly predictable returns. Equity funds do offer predictable returns but we mostly use their historical returns as an indicator. For example, the stock market has offered over 12% returns over a long period. That is why we use this number in our calculations.
(The article is part of new series ETMutualFunds is starting on new investors from this week)
