The other day, a client called about planning an SIP (systematic investment plan) for his sister. He was a recent client so I was happy to hear that. I asked him what his motivation was and he said “She has just started work. I think this is an ideal time for her to see the value of savings”. What made it special was that he was considering mutual funds to start her off. Despite all the false notions out there, one more customer had gained confidence in mutual funds and I was happy to play a part in it.
Yes, there are so many false notions about mutual funds that it deters people from participating. This is despite AMFI (Association of Mutual Funds of India) doing so much to educate people about mutual funds. It’s also sad because people readily flock to buy real estate or gold because it has an image of being ‘safe investment that doesn’t ever lose value'. So this is me busting a few myths so you can take an informed decision about investing in mutual funds.
Myth - Mutual funds require BIG investments
Not really, Mutual funds cater to both small and big investors. You can
- start an SIP with as low as Rs 500 per month
- do a one time (lump-sum) investment for as low as Rs 5,000
Let's say you started an SIP of Rs 3,000 and after 3 months, you have second thoughts. You can stop the SIP and you wouldn’t have put in a sizeable amount. Want to redeem it? It will take only about 1 - 5 days.
Myth - Mutual fund investments can’t be stopped or redeemed easily
Mutual funds are of two types – open ended and close ended. If you are new to mutual funds or don’t have sizeable exposure, start off with open-ended funds because they
- can be stopped at any time (takes 2 to 4 weeks to cancel the instruction)
- can be redeemed at any time
Remember that mutual funds are your savings; you choose to start and stop them. However, do take care to check these points
- some funds come with exit loads if redeemed within short periods
- tax saver of equity linked savings schemes are open ended but have a three year lock-in period
Myth - Mutual funds are the most risky investments out there
Yes, all mutual funds carry elements of risk. However one must learn to look at it this way – all investments carry risk. The more risk you are willing to bear, the more likelihood of higher return. That is why bank deposits don’t give high returns.
Different types of investments carry different types of risks
- Gold is difficult to store and comes under scrutiny at the time of selling
- Properties carry legal risk in the ownership sense and cannot be sold quickly
- Mutual fund investments run the risk of losing value in case some investments within the portfolio go bad. It is also important to time your exit to get the expected return.
The idea is to try and choose an investment vehicle which suits your profile and risk appetite.
Myth - ULIPs are better as they bundle both insurance and investment into mutual funds
Ever notice that Endowment / money-back / ULIPs (unit linked insurance plans) never talk about the rate of return? It only talks about the ‘guaranteed’ amount you will get back after a certain time period. Great sales pitch but it is highly likely that you’ll get returns lesser than a fixed deposit…. and the insurance cover is pathetic. You are far better off taking a term life insurance which gives you high coverage at cheap premiums and separately investing in mutual funds. You’ll then see that your financial planning is like the Sprite tagline – clear hai (sorry, bad one :)
Myth - An adviser is not necessary, Paytm Money or its equivalent will see me through
I know of a first time investor who had heard mutual funds were giving great returns so decided to invest with an idea of exiting after 6 months. Unfortunately, he invested in ELSS (equity linked savings scheme) which as I mentioned earlier cannot be redeemed for three years.
- an adviser would have been ideal here because they would have pointed this out immediately
- a good adviser would also inform that equity mutual funds attract short term capital gains if redeemed within 1 year
- a great adviser would tell the investor to not consider mutual funds if he doesn’t have an investment time period of minimum 3 – 5 years.
If you wish to invest directly or (later) if you think your adviser is no-responsive or incompetent, you can directly deal with a fund house. You can do this via app, website and call centre or drop into the nearest branch. Be wary of your bank relationship manager as they are under tremendous pressure to sell the highest commission generating products so you are most likely going to get terrible advice or worse, a ULIP.
Financial planning requires detailed understanding of a person’s financial goals and then translation into a tailor-made, executable plan. It also needs periodic monitoring and (if required) tweaking investments. If you are ready to start planning your finances or want us to look at your current portfolio or just chat about what’s going on, you can reach us at +91 7619593111 or mathewpravin@yahoo.com.
