Three Common Mutual Fund Myths

More Units Are Always Better

Many investors, in fact even seasoned ones, succumb to the fallacious belief that given the choice between two funds within a category, one should select the one that has a lower unit price or Net Asset Value since it’ll resultantly snag them a larger number of units. However, this is an incorrect assumption. Believing that a fund with an NAV of Rs. 50 is better than a fund with an NAV of Rs. 100 is akin to believing that two half apples are better than one apple! What matters in the end is how the fund’s underlying assets are geared to perform in the future. Many bellwether funds that have been around for more than two decades have very high NAV’s, and so investing into a newer fund with a lower NAV will certainly fetch you more units. However, the fund with a proven track record (and a higher NAV) is likely to be a much better investment in this case.

STP's are only used to move from debt to equity funds

STP’s or Systematic Transfer Plans have gained quite a bit of popularity off late. Their rapid adoption has been fueled primarily by Advisors who have used them as a tool to enter equity mutual funds in a staggered manner, so as to not expose client moneys to a specific market level. However, STP’s can be used in the reverse manner too, that is to stagger funds from equities to debt. This can be very useful for those who are looking to systematically de-risk their portfolios as they approach a goal, or those who have built up sizeable 100% equity portfolios through SIP’s over many years, and are now looking to adopt a more cautious approach in the face of overheated markets. Reverse STP’s are also very useful in helping investors counter the deleterious tendency to increase their equity exposure after markets have gone up.

Direct Plans are better than Regular Plans

There’s been a lot of debate on direct plans versus regular plans off late, and some investors believe that the marginal annual cost saving of roughly 0.5% that direct plans afford, makes them worth it. However, the jury is still out on this, and the retail exposure to direct plans still remains fairly low. All their simplicity and retail-centricity notwithstanding, it remains a fact that investing into MF’s directly, and unadvised, can be a perilous route to take for most investors. In the long run, direct plans could actually end up ‘costing’ you more. If you’re a first time investor with little knowledge of how securities markets work, investing into direct plans could be penny wise, pound foolish. Think before you make a choice.