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Sam Ghosh Founder and SEBI Regd. Investment Adviser at Wisejay Private Limited Bangalore, Karnataka
Misunderstandings related to Mutual Funds Investing
1 answer/comment
11:28:16 AM, 28th March, 2019
  • Sam GhoshFounder and SEBI Regd. Investment Adviser at Wisejay Private LimitedBangalore, Karnataka
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    I have seen variations of this question many times on social media

    “I am x years old, can I invest in mutual funds?’

    “I am a government employee, can I invest in mutual funds?”

    “I want to achieve ...., should I invest in mutual funds?”

    ....
    ....



    The answer to all these questions generally is – “Yes, you can.”

    These doubts arise from basic misunderstandings about mutual funds



    MISUNDERSTANDING 1: ALL MUTUAL FUNDS ARE SAME.

    The term mutual fund defines a form of investment not a type of financial security. Mutual Fund means a professionally managed investment fund, generally registered as a trust, which pools money from different sources and invests in assets based on predefined investment policy.

    Now, there can be drastic variation in the type of securities the fund invests in and the risk exposures the funds take. Also, the way different mutual funds collect funds from investors and issue units, the investment philosophy they follow to create a portfolio, the options they provide to the investors for redemption, the kind of liquidity the funds provided to the investors etc. can be drastically different from fund to another.


    More about Mutual Fund Classification:
    https://www.wisejay.com/openhouse/66/Classification-of-Mutual-Funds-as-per-SEBI-guidelines



    MISUNDERSTANDING 2: MUTUAL FUNDS ARE RISKY.

    Yes, all investments take some risk exposure but we cannot simply say that mutual funds are risky. There are many different kinds of risk and different mutual funds take exposure to different types of risk to different magnitudes. Understanding types of risk are vital to understanding which kind of mutual fund is suitable for you.

    Different types of risks:
    https://www.wisejay.com/openhouse/199/What-are-the-different-types-of-financial-risks-an-individual-investor-should-consider-while-creatin

    Risk Tolerance:
    https://www.wisejay.com/openhouse/70/How-Much-Investment-Risk-can-I-take



    MISUNDERSTANDING 3: ALL MUTUAL FUNDS ARE FOR GROWTH

    High return is not the only objective of investments. Someone can invest to save income tax, or to preserve capital, to get periodic income etc. Depending on the structure and the asset allocation followed by the fund, a mutual fund may help an investor meet various goals.

    Note: Asset allocation is the distribution of funds in different asset classes.
    More about asset classes: https://www.wisejay.com/openhouse/86/What-are-the-basic-asset-classes-and-what-are-their-roles-in-your-portfolio
    More about asset allocation: https://www.wisejay.com/openhouse/84/What-is-Asset-Allocation-and-what-you-should-know-about-it


    So, there are Equity Linked Saving Schemes (ELSS) which offer tax exemption and growth, there are Fixed Maturity Plans (FMP) which are comparable to Fixed Deposits and there are Liquid Funds which are comparable to a savings accounts.




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