Myth Buster Series
Myth Buster Series: Equity
Myth 1 : Investing in schemes with lower NAVs can generate gains
Fact : The Net Asset value (NAV) is simply the price at which a unit of particular scheme can be bought or sold. So, investing in schemes having a NAV of Rs. 50 or Rs. 500 is no where related to the gains you can expect from your investments. Some of the factors that may be considered are rate of return , the performance and volatility of the scheme, etc to name a few.
Myth 2 : If a fund announces dividend, then it is a good time to buy.
Fact : Dividends are announced based on the surplus profit collected by the fund from its holdings. This surplus profit is retained within the fund until it is paid out to the unit holders and reflects in the NAV of the scheme. When the dividend is paid out, the NAV drops reflecting that change. Hence, investors don’t gain anything by timing the purchase.
Myth 3: Sell when the NAV is high and invest in schemes with low NAVs
Fact : When you buy a share, you track the share price and sell when it rises to a certain level above the purchase price. Mutual Fund schemes invests the amount collected by the investors in shares The NAV of a mutual fund is the value of the scheme’s assets minus its liabilities, divided by the total number of units. A high NAV does not mean that the fund will offer great returns and neither does a low NAV means otherwise.
Myth 4 : Mutual Fund investments are all about timing
Facts : Most investors fall for this. Attempts to time market are met with disasters and investors are usually advised against it. Investors may Opt for Systematic Investment Plan (SIP) or a Systematic Transfer Plan (STP) and aim to benefit from the Rupee Cost Averaging of your investment.
Myth 5: SIP and STP is same.
Facts : Though they sound same and have similar benefits but the working is a bit different.
In SIP you invest a fix amount at regular intervals. When the market are higher, lesser units are purchased and when they are low, the number of units purchased is higher. Over a long investment window, the cost averages offering a lower overall purchase price. STP simply means that a fixed amount on a predetermined period as per the mandate submitted by the investor is transferred from one scheme to another
Myth 6 : Dividend pay-out/Growth is all the same
Fact : No. In a dividend pay-out option the dividend declared by the scheme is paid out to the investor. In the growth option, it is retained in the scheme and is reflected in the Net Asset Value (NAV) of the scheme.
The dividend pay-out option offers regular cash flow (based on the availability of distributable surplus), while the growth option gives you a compounded benefit through a higher NAV.
Myth 7 : Investment in Mutual Fund carries a higher risk than the stock market
Fact : A mutual fund invests in a wide array of equity and/or debt instruments as defined in its investment objective. The fund manager selects stocks meticulously to minimize the risk and maximise diversity. This makes investment in mutual fund less risky than direct investments in stocks. However, investors are requested to consult their financial advisors before investing.