Misconceptions in Mutual Funds

If you are an investor in Mutual Funds for last 7-8 years then probably you are one of the witness of dramatic changes in this industry. From visiting to a distributor office for filling the application  form to doing the same at your office or home with a mouse click, the journey has been quite memorable.

From days of industry giving high commission to distributors to now customers paying the cheque directly to advisors,the feeling was that these changes will also help in educating customers on Investing in Mutual funds.But after meeting many investors, i found there are certain misconceptions which were jot down by distributors during the initial phase of the industry and which still persists today.These misconceptions gives a feeling we still have a long way to go before investors start understanding real benefits of Mutual Funds Investments.

Following is the list of such misconception which any investor will ask before investing in a Mutual fund scheme:

I have an invester who has invested in 50 Mutual Funds schemes on the advise of his previous distributor.The reason was to diversify the portfolio.What he failed to understand is that by overdiversifying he is risking his total portfolio for underperformance.The concept of diversification is to select few good schemes for investment and grab the opportunities available in the stock market.By over-diversification you get exposed more to under performing schemes and thus miss out the opportunities of best returns.

The most discussed misconception with every second investor.Rationale is that by getting more units your  profit is more. Not True. If thats be the case then fund like HDFC Top200, DSPBR top100 Equity and BirlaSunLife Frontline Equity would have been struggling to convince investors and generate corpus.But their performance itself speaks the truth. Fund Performance rest on Investor Risk Apetite,Portfolio of Stocks,Fund Manager,Expense Ratio and Other factors.Higher Units does not guarantee Returns.

Systematic Investment Planning or SIP as it is known,is a very good tool for wealth creation.But most investors fails to understand this and it is being used as a mere breaking a lump sum investment into tranches.The drawback of such thinking is that you are investing for returns and not for wealth creation.Moreover,investors misunderstanding is that SIP is a scheme and not an option.

By highlighting these misconceptions, the idea is to generate awareness and educate todays investor so that he/she can reap the real benefits of Mutual Funds.The mis-selling through these misconceptions has only decreased not stopped. So if you are about to make an investment decision based on these,think again.