Mutual Fund - Common Myths

Myth 1 - You get Mutual fund cheaper when you are investing at the Time of NFO.
Most investors think that an NFO of Rs 10 is cheaper than an existing scheme with a higher NAV. It is the percentage return on invested funds that matters as far as investors are concerned. For example, given a similar performance level of 20 per cent appreciation, Rs 10 NFO will rise to Rs 12 whereas Rs 117 NAV will rise to Rs 128.7. In both the cases actual gains for investors remain the same.
The advantage one can think of is that some funds do not charge entry load during NFO period.

Myth 2 - Dividend declared is a Gain for Investors
When Hindustan Lever gives you a dividend, it transfers money from its pocket to your pocket. To that extent, Hindustan Lever becomes poorer and you become richer. However, when a mutual fund gives you dividend, it is transferring money from your Mutual Fund account to your Bank account. After dividend is declared and paid, neither is the mutual fund poorer nor are you richer. Its only your money coming back to you. In other words, the value of your investment (NAV) falls to the extent of the dividend. For example, NAV of a fund is Rs 43(face value 10). Fund declares a dividend of 100% (Rs 10). After dividend NAV will get reduced to Rs 33.

Myth 3 - Mutual Fund invests in Share Markets only
Mutual Funds also offer schemes that invest in Debt (bonds/securities) also. Debt schemes are not very popular among retail investors. Mutual funds also offer Hybrid funds (called Balanced funds) which invest in both shares and debts in almost equal proportion. Also recently Gold based ETF (Exchange Traded Fund) schemes were launched. Very soon we will see Real Estate Mutual funds as well.

Myth 4 - You should invest in Taxgain schemes only if you want to save Income Tax
Mutual Funds’ Tax Saving Schemes (ELSS – Equity Linked Saving Schemes) have a lock in period of 3 years. Apart from this there is no difference between them and other schemes. In fact due to lock in period – fund manager gets freedom to invest in shares which are out of favour for short term but expected to perform better over long term. SBI Mutual fund’s Magnum Taxgain has a very good track record.

Myth 5 - You cannot encash Close Ended Funds before Maturity
Close ended funds are “closed” only for fresh subscriptions. Investors can encash/redeem/exit the units by paying applicable charges.