Know these 6 Mutual fund beliefs
For example , you invest Rs 1,000 each in a new fund, A (whose NAV is Rs 10) and an old fund, B (the NAV is Rs 50). You will get 100 units of fund A and 20 units of fund B. Let's assume both schemes have invested their entire corpus in just one stock, which is quoting at Rs 100. If the stock appreciates by 10%, the NAV of the two schemes should also rise by 10%, to Rs 11 and Rs 55, respectively. In both cases, the value of your investment increases to Rs 1,100. Fund B's NAV is higher than fund A's because the former has been around longer and had bought the scrip much earlier, which itself saw some appreciation. Any subsequent rise and fall in the NAVs of both these funds will depend on how the scrip moves in which they have invested.
3) Belief: Children's mutual fund schemes are ideal to assure a child's future.
Reality: MF children schemes work like any other MF scheme, and their returns depend on the performance of the markets. Most of these schemes are long term, which means the portfolio will be heavy on equity. Shortterm schemes will be more into debt. None of these schemes assures returns. Treat these funds like any other-compare their returns, risk and performance before investing.
The following are 5 mutual fund beliefs need to know before taking decision of choosing mutual funds
1) Belief: A balanced fund is always equally balanced in a 50:50 ratio.
Reality: Balanced funds aim to achieve a balance between equities and debt. But this can tip depending on the nature of the fund. Equity oriented balanced funds typically invest at least 65% in equities and the rest in debt, others do this in a 40:60 ratio. So it is not always true that balanced equity mutual fund means 50:50 ratio between equity and debt. The ratio of 50:50 may vary.
2) Belief: A fund with a net asset value (NAV) of Rs 10 is cheaper and so, more attractive than a fund whose NAV is Rs 50.
Reality: A mutual fund's NAV represents the market value of all its investments. Any capital appreciation will depend on the price movement of its underlying securities.
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4) Belief: Funds with a large corpus can generate higher returns.
Reality: Funds with a very large corpus are prone to inefficiencies as rising assets become unmanageable after a point. Also, most fund managers are comfortable managing a mid-sized fund and an increase in the AUM can adversely affect their performance. This is because large assets force fund managers to broaden their stock universe, which sometimes results in less researched or low potential stocks in the portfolio. But it may not be always true.
5) Belief: Funds that regularly declare dividends are good buys.
Reality: Fund houses declare dividends when they have distributable surplus. However, there are times when a fund manager declares dividends if he does not have adequate investment opportunities. Under worse conditions, a fund manager may sell some good stocks to generate surplus for dividend distribution. The motive is to attract investors. But it may not be always true.
6) Belief: SIPs score over lump sum investing.
Reality: A systematic investment plan ( SIP) is the best way to invest in volatile markets. It benefits by lowering the average per unit cost. However, SIPs result in lower returns in consistently rising markets. They fail to lower the average per unit cost and thereby result in lower return as compared to lump sum investments. At the same time it is not possible for anyone to predict the exact direction of market so it always advisable to invest through SIP unless and until you are 100% sure of rising market for any given point and do lump sum investing.
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(Posted date - 28 Feb 2012)