Myth about Mutual Fund Investing

Even today, 95-96% of Indians invest in traditional products like fixed deposits, recurring deposits, and savings accounts. They also invest in National Savings Certificates (NSC), Post Office products, Public Provident Funds (PPF), Gold Bonds, Government bonds, and Insurance. Only about 4-5% of people invest in mutual funds.

Many people don’t calculate the real rate of return after adjusting for inflation. A good post office scheme provides an 8.5% return over some period. After considering 6.5% inflation, the real return is just 2% (8.5% – 6.5%). Is this enough for their life?

Many people then depend on the Provident Fund (PF), which often isn’t enough for retirement expenses. A large number of elderly people depend on their children. The government gives little attention to these people.

Financial influencers (finfluencers) explain this situation to working individuals. They advise people to invest in mutual funds. They provide very basic information about the risks involved. They share the following information to influence investment decisions:

1. Real rate of return calculation, as mentioned above
2. Approximation of high returns in mutual funds (15-20%) based on past records
3. Liquidity factor
4. A big dream of becoming a millionaire or billionaire
5. Some unrealistic guarantees about retirement savings, which may come true in some cases

While some points may be true in certain situations, let’s discuss the myths about mutual fund investing.

High Rate of Returns

Nowadays, due to SEBI regulations or fear of law, people expect moderate returns in mutual funds. However, many influencers still show attractive return figures to convert leads. I was told one mutual fund could earn 29% annually.

If I invest Rs5000 monthly for 5 years, it can grow significantly. After 15 more years, it could reach nearly Rs3,25,00,000 at a 29% per annum rate. Even if this dream comes true, I must wait 20 years. My investment is Rs3,00,000 (Rs5000 * 12 * 5), but the time period is too long. Who knows if I’ll survive another 20 years?

If my investment grows at 15% per annum for 20 years, it may reach only Rs75,00,000. There is a huge difference. At 15%, investment grows 16.5 times; at 28%, it grows 139.5 times. That’s quite high, isn’t it?

Now, use this money to buy a house. You may realize you haven’t saved enough. Inflation could eat up 5 times from 16.5 and 139.5 times returns. House rates will probably grow 10% per annum. This will eat another 10 times from 16.5 and 139.5 times.

Is it a good return (16.5 – 5 – 10 = 1.5 times) (139.5 – 5 – 10 = 124.5 times)? Expecting 28% returns can be difficult, but if achieved, it’s great.

Conclusion: You can expect high returns both short-term and long-term. Wealth is created in the long run. Your investment will eventually stop when your income stops. Your investment amount should match your monthly earnings expected after retirement. An amount over Rs20,000 a month would help

1. Consistency in Investment

Consistency of investment in mutual fund is utmost important. The same consistency can be broken due to following reasons –

1. Low Income – Low income creates inconsistency in investments. Needs are unlimited and income is limited, which is a reason the investment consistency becomes difficult. Low income often leads to low investment as well. E.g. if the income is 20,000Rs., expecting a person to invest even 5000Rs is difficult, forget about consistency of investment.
2. Expected Expenses – Expenses like, marriage of family members or self, illness (if no Mediclaim insurance), child’s birth, school/college expenses, higher education, religious rituals, holiday, festivals etc. are some of the big, expected expenses. These expenses reduce the consistency factor from investments. It, sometimes may even zero out the investments already made. Then the investor starts all over again. Sometimes, if some personal or education loans are taken for such expenses, it further delays the investment.
3. Lack of Knowledge and Study – Lack of knowledge about the benefits of investing consistently for a longer period, leads to inconsistent, low investments. Also, lack of study leads to an incorrect investment.
4. Different Priorities – Sometimes if our priorities are different, the situation can lead to inconsistent or no investments. For example, if my aim is to buy or construct the house, to invest in business, to donate, to help siblings, friends, relatives etc. leads to inconsistent and low investment.
5. Belief System – Your belief system can make you consistent or inconsistent investor in mutual funds. You may believe that traditional investments are better or you may believe that your priorities are different. All this leads to inconsistency in the investment in mutual funds.

2. Reasonable Investment

Reasonable investment is a relative term. What is reasonable for me can be overburden for you or it can be just few pence for you. However, by reasonable I mean, we have to target some amount and do back working with the help of online tools to come to an amount needed for the investment today to achieve that target.

If your expectations are high but you cannot afford the required investment, at least you start the investment and slowly increase that to a comfortable level that can achieve your target.

Most of the time, reasons mentioned in point number two above, fails the investor to make reasonable amount of investment every month.

To overcome this situation, simply start investing; whatever the amount may be. Be consistent. Be consistent in increasing the investment as well.

3. Consistency in High Returns

This is a big myth that MF makes you earn consistently high returns throughout the investment and/or waiting period. Situation like Covid-19, Lehman bros. collapse, can put your investment at backfoot. That’s where the courage and patience are required.

However, in the long run it can make you earn higher returns certainly. But again, for that, consistency, patience, risk taking ability, belief are required.

4. Quick and High Returns

This is most popular myth amongst investor that they can earn very high returns in real quick time. On the contrary, the capacity of mutual funds to generate the returns and money depends on two factors, your investment and the time given for your investment to grow. Higher the money invested, better it can generate money. I said, ‘better it can generate money’ but not return. For example, if you invest $10000 in mutual fund can make you earn $1000 @10% return. So, you can have $11000. Now, assume you invest $25000 which made you earn same 10%. Now you can have $22000 with you.

Meaning higher the amount, higher and faster you can accumulate the wealth. So, investment amount will play a key role than investment returns.

5. Selection of Mutual Funds

Many people just go on investing in mutual funds, hoping to receive the good returns. But they fail to select the mutual funds and then invest. For example, if I need Rs.100000 to pay the school/college fees after 6 months’ time. People will randomly invest in the mutual fund that they believe it will generate the returns to pay the fees.

But they do not anticipate the risk of market going down. God forbid, but what if the market tumbles exactly when they need money? They may have to arrange it from different source or they may have to break more investment. Instead, if they had invested it in fixed income mutual fund or short-term investment funds (STIF) etc. they would definitely secure the investment and returns on it.

If people want money exactly after a year for some reason, they cannot invest in such mutual funds having lock-in period of three years. That means investing randomly, even if the fund is performing exceptionally well, will not justify the investment.

6. Not Setting a Goal

1. A big percentage of the investors do not set the goal before investing. Either they do not know for what the goal setting is needed or they do not know how to set the goal or simply because of an ignorance.

Setting goal is important because –

1. It lets you select the fund
2. It lets you invest adequately
3. Even if they require to break investment, they can break the one which is not needed immediately
4. It lets the investor control the investment
5. Investor can track it smartly
6. It lets investor definitely achieve the goal
7. Even after achieving the goal, investor will have another investment in hand
8. It lets you budget and limit your spending. Hypothetical example, if you want to purchase a television worth Rs20000, you will buy it under that budget and you will not cross your budget.
9. It lets you delay the decision. A delayed decision can make you save all or some part of the investment. For example, if you want to purchase new car and you start investing for the same. Before you achieve this goal, you delay the decision of purchasing car. Maybe meanwhile you can get another model of car which is little cheaper or better. Sometimes, you may change your mind and will continue with the existing car, making you save lot of money.

7. MF is the Only Highest Return Generating Investment

This is a popular myth amongst whole investor community. While you may think the percentage return is high in MF investment; there are better investments available. Few of them being –

Business – It can make you earn as high as up to 1000%. For example, medicine, restaurant business etc.

Real estate – Percentage returns in real estate may sound low but the amount of return matters. 15% of $20000 (mutual fund) v/s 1% of $1million (real estate) can create huge difference. Interestingly, you don’t have to invest whole $1million. You pay just minimum payment required and the rest is financed by banks or financial institutions.