11 MUTUAL FUND MYTHS

Transcription

1 An investor education initiative from Deutsche Mutual Fund 11 MUTUAL FUND MYTHS Toll Free

2 Foreword A myth is a widely held but false belief or idea. Mutual Funds have given rise to many myths. These myths invariably give rise to undue fears and concerns in the mind of investors and keep them away from fully realising the benefits of Mutual Funds. This booklet titled 11 Mutual Fund Myths Exposed tries to break wrong notions generally associated with investments in mutual funds. Using simple language and anecdotes from daily life, we have tried to expose some of the biggest myths and enlighten investors about the true facts of mutual fund investments. We hope this booklet will help clear your doubts and misconceptions about mutual funds and make you an informed investor. Deutsche Mutual Fund, a leading mutual fund house, as part of an investor education initiative, has tied up with ICRA Online Ltd. (a sister concern of ICRA Ltd., a leading rating agency) to bring you a series of booklets, which will help you understand the basics of financial planning and guide you on your path to meeting your financial goals. To download the complete set of booklets in our investor education series visit Our objective is to make you aware and informed so that you make the right investment decision. Do write in with your feedback to deutsche.mutual@db.com Best wishes for myth-free investment decisions. Happy investing!

3 Next year will be our 10th wedding anniversary. We must celebrate! Yes. Of course Even a modest celebration will cost us quite a bit of money. How will we manage? Don t worry dear, I have already started investing in mutual funds for the occasion. But mutual funds are long-term investments, aren t they? Long-term! Thats true for equity funds. I have invested in short term debt funds to meet our needs. Thanks hubby!! Myth 1 Mutual funds are only for the long term Mutual funds are useful for every investment purpose, be it short term, medium term or long term. While Liquid and Short-term Debt funds are suitable for short and medium-term requirements, Equity funds are ideal for long-term needs. So if you are planning to save money to celebrate your anniversary next year, you may opt for Liquid or Short Term Debt Funds, but if you are building a corpus for retirement, Equity funds will be more suitable.

4 That s a huge target. It would be difficult for us to win this match. We have to go for fours and sixes right from the beginning. Don t try to take risky shots with every ball. Rather, take short runs regularly. We are progressing well even without many big hits. Wow, India has won the match comfortably. The strategy of taking short runs regularly paid off well!! Myth 2 One needs a large sum to invest in mutual funds There is a common notion among a large section of investors that they need a huge amount of money to invest in mutual funds. In reality, it is just the opposite and one can invest as low as Rs. 500 per month via Systematic Investment Plan (SIP) and Rs. 5,000 through lump sum mode. What s more, there is no monthly or annual maintenance charge even if you don t transact further. Just like the batsmen reached the huge target by taking short runs regularly, you too will be able to meet your financial goals by investing a small amount regularly over a long period of time.

5 Annual results day of the school Our kids will complete school education in a few years. Higher education is becoming expensive with every passing year. I have started investing in mutual funds to build my son s higher education corpus. But mutual funds are very risky, they invest in share markets. All mutual funds do not invest in share markets. There are many funds that invest in bonds, Government Securities, gold etc. Really? That means all mutual funds are not very risky. Children are coming out with mark sheets They seem to have done well. Now we have to ensure a bright future for them. Myth 3 Mutual Funds invest money only in the share (equity) market There are various types of mutual funds available in the market which cater to individuals having different risk appetite. So if you are a risk-averse investor, you may opt for a debt fund which invests in Government Securities, Bonds and other fixed income instruments. There are even mutual funds that invest in gold. All mutual funds do not invest in equity markets and you can choose a fund keeping in mind your risk appetite and financial goal.

6 Hi Mahesh, how are you? Where are you going? I am not well friend, I have developed a heart problem and so I am going to this hospital for consultation. I am really sad to hear this, friend. But this hospital is known for neurological treatment. Yes, one of my colleagues got his neuro problem completely cured here. My friend, there is nothing in common between neurological and heart treatment. Both require different medical expertise. You need to choose a hospital which serves your purpose well. Hmmm I never thought this way! This hospital specializes in heart treatment. Better consult with specialists of this hospital. Thanks friend!! Myth 4 Debt funds are also impacted by equity market movement Just like neurological illness and heart ailments have no connection and require different medical expertise, similarly events in the equity markets are unlikely to impact the performance of a debt fund. Debt funds and equity funds invest in separate set of instruments and have a completely different portfolio and fund management strategy. Thus investors who want to avoid the volatility of equity markets and have a shorter time frame to achieve their financial goal may opt for less risky debt funds.

7 The daughter is discussing with her father the recent trend in equity markets Papa, equity markets are trading at very high level these days. True, but when did you start following markets? We were discussing this among friends. In fact, a friend invested in a mutual fund NFO at a cheap price of just Rs. 10. It is good that you are thinking about investments. But don t think that a scheme with NAV of Rs. 10 is cheaper than a scheme with NAV of Rs But papa, how can that be possible? If markets move up 20% in a year, the fund value of both the schemes with higher and lower NAV will rise by 20%. Now I know why a Rs.10 NAV is not cheaper than a higher NAV fund. Myth 5 Mutual Funds with Rs.10 NAV are best to invest There is a common misconception among investors that a scheme with NAV (Net Asset Value) of Rs.10 is cheaper than another scheme with NAV of Rs If we assume that an NFO (New Fund Offer) maintains similar portfolio as that of an existing scheme with NAV of Rs. 100, the returns would be same irrespective of the NAV. So instead of concentrating on a low NAV and more number of units, it is worthwhile to consider other factors before investing like the performance track record, fund management and volatility that determine the portfolio return.

8 Wow!! The much awaited movie of my favourite Super Star is finally here. It's going to be a smash hit!! I think this movie will break all box-office records. Let s go inside now, the movie will start soon. During the movie Not much, let s see what s there in store after interval. Hey, are you liking this film? After the movie It was a boring movie! Stars alone cannot make a movie hit. The main things are good plot and story, which were missing in this film. Myth 6 Investing in a fund managed by a 'Star Fund Manager guarantees success No one can predict market performance. A 'Star' fund manager who has delivered high performance in the past may not always do so in the future. Same is also true of 'Star' Fund Houses. Therefore, when investing, don't blindly follow star fund managers, but select a fund that meets your investment objective and risk appetite. Just like a movie starring a super star cannot guarantee success at the box office, similarly a star fund manager or a star fund house cannot always guarantee good returns.

9 Wow Vidya, the fund in which I was thinking to invest has announced dividend. So I must buy some units of the fund now. But Sree, announcing dividend cannot be the sole reason behind your investment decision. ABC Fund announces Rs dividend per unit Under the dividend payout option, a part of the profit made by the scheme is distributed to investors. But the NAV drops to the extent of dividend paid. Really? Then I don t find much value in dividend declaration of a fund. Exactly. When dividend is not declared, it is reflected by way of appreciation of NAV. Myth 7 Buy a fund once it announces dividend A fund s performance is evaluated by the movement of its NAV and not on the amount of dividend paid. Dividends are paid out of accumulated and realised profit of the fund. Under the dividend payout option, the profit made by the fund is distributed among investors, while in case of a growth option, the profit is retained in the form of a higher NAV. Thus, an intelligent investor never times a purchase in any mutual fund based on declaration of dividend.

10 The appraisal time is nearing, I need to show some work now. Ya, ya no problem, I will leave office early today and join the party. The appraisal time is near, so the guy is trying to impress me. Boss, I hope to complete the report today itself. Employees have received their appraisal letters Congrats for the promotion!! Your persistent hard work has paid off. Myth 8 You need to time MF investments There is no alternative to hard work and discipline in life and mutual fund investments are no exception. Just like regular and sincere work pays off in real life, a similar approach in mutual fund investments is also desirable to achieve financial goals. Market movements are unpredictable and one should not try to time investments. Rather, stay focused on your financial goals by investing regularly and success will follow.

11 Doctor, my illness recurred even after taking medicine. Strange!! It should not have happened. How long did you take the medicines? I took it for 7-8 days at a stretch doctor. Then I felt better and so stopped the medicines. But I prescribed you to take the medicines for one month. You have to complete the entire course of the medicine. If you stop taking medicines in between, it is natural that your illness will not be cured totally. Sorry doctor, I won t do that again. Myth 9 Stop SIPs when markets are rising Just like the total course of a medicine needs to be completed to get fully cured, similarly your SIP must be continued throughout its term to achieve the desired financial target. Rather than trying to time the market, you should invest regularly to reap the benefits of rupee-cost averaging. If you have a long-term investment perspective, short-term fluctuation in markets should not alter your plan to meet your financial goals.

12 Guys, I often worry how we will manage after retirement without pension or regular income. Everything is getting costly day by day. I wonder how we will cope? Why don t you start investing in mutual funds and build a retirement corpus? But I don t have a demat account, how can I invest in mutual funds? Demat account is not mandatory for mutual fund investments. Just fill up the application form and submit your KYC documents. But then the transaction process must be difficult. These days you can do all transactions online. Or, just submit a signed instruction slip at the nearest Investor Service Center of the mutual fund. Myth 10 One needs a demat account to invest in Mutual Funds Mutual Fund investors are free to receive the units either as a physical statement or dematerialised form. So, it is not mandatory to have a demat account for investing in mutual funds. If you are a first-time investor in mutual funds, you need to fill up a Know Your Client (KYC) form and submit it along with your application form and relevant supporting documents. Once your KYC documents are verified, your investment will be accepted.

13 There are lots of rides, games and other activities inside the park. We ll have a blast! But there would be long queues in front of all the counters. I am not going to enter the park. Don t worry friend. You don t need to stand in queue every time you want to play a game or enjoy a ride. You can have a combo ticket for all the rides. Well... in that case, I don t mind entering the park. Myth 1 1 KYC is required multiple times for Mutual Fund investments KYC (Know Your Customer) is just a one-time exercise and the process can be completed through a SEBI- registered intermediary (broker, Depository Participants (DP), mutual funds, etc ). You need not undergo the same process again while approaching another intermediary. As per the KYC requirement, you need to submit an identity proof, address proof and latest photograph to invest/transact in mutual funds/securities markets. KYC is mandatory to invest in mutual funds. Just like a combo ticket to an entertainment park makes it easy to enjoy all the rides, doing KYC one-time allows you to invest in all mutual funds hassle free.

14 1 1 Mutual Fund Myths Exposed Myth 1: Mutual funds are only for the long term Myth 2: One needs a large sum to invest in mutual funds Myth 3: Mutual Funds invest money only in the share (equity) market Myth 4: Debt funds are also impacted by equity market movement Myth 5: Mutual Funds with Rs.10 NAV are best to invest Myth 6: Investing in a fund managed by a 'Star Fund Manager guarantees success Myth 7: Buy a fund once it announces dividend Myth 8: You need to time MF investments Myth 9: Stop SIPs when markets are rising Myth 10: One needs a demat account to invest in Mutual Funds Myth 11: KYC is required multiple times for Mutual Fund investments

15 Buy Buy Buy Buy Buy Buy Sound investment advice, simply explained. An investor education initiative from Deutsche Mutual Fund An investor education initiative from Deutsche Mutual Fund 10 Reasons why you need a financial advisor for investment success Toll Free Download for free other popular booklets from the Invest Education Series of Deutsche Mutual Fund deutsche.mutual@db.com Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

16 An investor education initiative from Deutsche Mutual Fund Toll Free Copyright: This document is the property of ICRA Online Limited (ICRON) / Deutsche Mutual Fund, and no part of this document or its content, can be copied, reproduced or distributed, in any manner, whatsoever, for any unauthorized or illegitimate purpose. Disclaimer: All information contained in this document has been obtained by ICRON from sources believed by it to be accurate and reliable. Although reasonable care has been taken to ensure that the information herein is true, such information is provided as is without any warranty of any kind, and ICRON or its affiliates or group companies and its respective directors, officers, or employees in particular, makes no representation or warranty, express or implied, as to the accuracy, suitability, reliability, timelines or completeness of any such information. All information contained herein must be construed solely as statements of opinion, and ICRON, or its affiliates or group companies and its respective directors, officers, or employees shall not be liable for any losses or injury, liability or damage of any kind incurred from and arising out of any use of this document or its contents in any manner, whatsoever. Opinions expressed in this document are not the opinions of our holding company, ICRA Limited (ICRA), and should not be construed as any indication of credit rating or grading of ICRA for any instruments that have been issued or are to be issued by any entity. It is further clarified that this document is only for the purpose of providing general information and guidance to the public and should not be construed as an offer or solicitation of an offer to buy or sell any securities. The document is neither an ultimate source of the subject matter covered nor is intended to be a professional advice. Reference to all the characters in this document is entirely fictitious and any resemblance of any character to living persons, living or dead, or to any entity / financial institution is purely coincidental. Users/recipients of this document may exercise their own care and judgment and independently take professional advice before acting on information contained herein. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.