Prevailing myths about mutual funds

There was a time when the only mutual fund that an Indian investor could invest in was the Unit Trust of India's Unit Scheme-64. It was only in 1987 the first non UTI mutual fund, the State Bank of India (SBI) promoted SBI MF, was launched.

The private sector got a foothold in 1993 and the rest, as they say, is history. From a meagre Rs600 crores in 1984, today the mutual fund industry boasts of funds of over Rs4,85,000 crores under management.

And yet, even now, the mutual fund remains the least understood and the most misunderstood investment instrument. The following are the two most crucial areas where investors tend to make mistakes in their investing process:

1: An NFO of Rs10 is cheaper than an existing scheme with a higher NAV
This is by far the most enduring myth that investors continue to believe. Of course, by launching one new fund after another, the mutual fund industry perpetrates the myth, and distributors who stand to earn more commission by selling new funds exacerbate the perpetration.

Somewhere between the high-decibel advertising on the one hand and the persistent distributors on the other, the fact that it is the percentage return on invested funds that matters remains unnoticed and overlooked.

For example, given a similar performance level of 10 per cent appreciation, a Rs10 NAV will rise to Rs11 whereas a Rs200 NAV will rise to Rs220. It's a simple truth that is neither told nor heard. In fact, due to already demonstrated performance, the chances of the Rs200 scheme posting the 10 per cent appreciation is far higher than the rookie that has just started its innings. 

2: Don't invest just because of dividend:
The term 'dividend' in relation to a mutual fund is a misnomer that the regulator should have come down upon long ago. When Infosys gives you a dividend, it transfers money from its pocket to your pocket. To that extent, Infosys becomes poorer and you become richer.

However, when a mutual fund gives you dividend, it is transferring money from your left pocket to your right pocket. Post-dividend, neither is the mutual fund poorer nor are you any richer. Its only your money coming back to you.

In other words, the value of your investment (NAV) falls to the extent of the dividend. For example, as on August 16, the NAV of the growth option of Reliance Vision scheme was Rs202.69 whereas that of the dividend option was Rs51.74. The difference of Rs150.95 is dividends paid over time.

To sum up...
It is as simple to earn healthy returns from your mutual fund investments as it is not to. Just do the basics right, invest with established diversified schemes with a good track record, let the money work hard and stay away from gimmicks.

The author is the director of AN Shanbhag NR Group