Myths While Purchasing Mutual funds..!!

Choosing a good mutual fund is an important decision. While doing so, even intelligent investors go by the hypes surrounding mutual fund schemes. There are a number of misconceptions that plague investors and have a direct negative impact on our investments...Checkout these..!!

Funds that regularly declare dividends are good buys ??

• Dividend income is one of the important criterion which many investors consider before buying a MF. Fund houses declare dividends when they have made significant profits and want to share it with the investors. 

• But if they declare dividends since they do not have sufficient investment avenues and feel it’s better to declare a dividend than holding cash or some fund managers sell off good stocks to raise money to declare dividends to ensure that the investors think they are also competitive then the investment decision may not be the best. 

• This can be found out by tracking quarterly performance of MFs and their recent activities.

NAV of Rs. 10 is cheaper than a fund with NAV of Rs. 50 ??

• This is yet another big misconception that investors in India have. People feel funds with lower NAV’s are cheaper and therefore are better.

• Let take an example. Let’s say MF A is available now for NAV of Rs. 10 per unit and then we have MF B that is available for NAV of Rs. 100 per unit. Suppose, I want to invest 1 lakh lakh rupees now and I split my money equally between the 2 funds.

• Units got from Investing in Fund A = 10000 (@ 10 per unit)
• Units got from Investing in Fund B = 1,000 (@ 100 per unit)

• 10,000 units sound a lot more than 1,000 units – right? But, this is not a correct comparison because B is 10 times more valuable than A.

• Let’s assume that the investment philosophy of both funds is very similar and at the end of the year, both the funds have grown by 12%. So, are you must be thinking that my investment in fund A would've made more profits for me? After all, I purchased 10000 units of fund A. Right?

• Value of Investments in Fund A (10,000 * 11.2) = Rs. 1, 12,000/-
• Value of Investments in Fund B (1,000 * 112)   = Rs. 1, 12,000/-

• Though I had 10,000 units of Fund B and just 1000 units of Fund B, the profit I made is exactly the same because the two funds gave exactly the same 12% returns.

• In fact the NAV of fund B is high, which is a sign that this fund has been actively and properly managed and hence the fund’s assets have increased from Rs. 10 per unit to Rs.100 per unit. Which is a good indicator of the fund’s performance and there are chances that it would outperform the new fund