After interacting with you and new prospects i found there are certain myths in the minds of investors which needs to be clarified to become an informed investor. In order to do the same i’m touching upon some of the basic myths and facts of investing through the below writeup. Hope you find it useful.

NAV MYTH: 

Most of the investors would like to invest in Rs 10 NAV’s assuming it is cheap. And some of the entities and people from our fraternity make use of it and try to sell them with NFO’s when the markets are in a good momentum. But the reality is it does not make any difference whether it is Rs 10 or Rs 100/-. Assume if both the funds move by 10%, then  Rs 10 fund will become 11; the other Rs 110.

DIVIDENDS MYTH:

Dividend from a mutual fund is completely different from a dividend from a company. Dividend in a mutual fund is your own money coming back to you. The exact amount of dividend that is declared will be reduced from the Net Asset Value (NAV), so effectively your netwealth does not change. It  helps in taking periodic profits out of your investments. The strategy is mostly suited for people who require cash flows from their investments to fulfil their needs. That too with a 5 year horizon, which helps to tide over the intermittent volatility and helps to generate better returns than traditional investment avenues.For others it is better to opt for growth to benefit from the compounding of returns.

CHASING RETURNS:

People often misguided by seeing one year returns. However it is very important to keep in mind the long term track record of the fund across different market cycles. If you keenly observe though one year return may look great, if you deep delve into its 5 or 10 year average it is more or less same. It is just not the returns, what matters most is the People, Process and its  risk adjusted returns. Each fund goes through ups and downs. There is no point in chasing performers.

Do not get carried away by one year returns and invest. Though most of you had witnessed higher returns in the last 3- 5 years particularly from small and mid cap classes of funds,  It is hard to repeat the same in the foreseeable future. Even fund houses stopped fresh subscriptions to those funds,  because of high valuations.

INVESTING MEANS ONLY EQUITY: 

There is a perception among majority that mutual funds invest only in equity. There are various investment options to choose from few days to years depending on one’s needs.They offer various product options which earn better post tax returns than the FD’s, generate regular cash flows, etc. Close of 70% of the mutual fund industry AUM is non- equity.(more than 10 lakh crores) 

HIGHER THE RISK, HIGHER THE RETURNS: 

   Warren Buffet describes risk as “not knowing what you are doing”

There is a common perception, 99% of the people believe that higher the risk, higher the returns. That is what being taught in conventional education system also.

But the fact is lower the risk leads to higher the returns. The same has been proved in the markets for a very long time.  It takes a long time to realize that the smart guys are the ones who take low risks. So, lower risks lead to higher returns. Many great investors like Buffet etc. had created wealth by minimizing the risk.

Example:

Go back to last 4-5 years back. Valuations of mid and small cap stocks and funds were compelling to invest.The downside risk is lower. And those invested at such valuations reaped decent returns. 

Another example I would bring to your notice is, 2008 global crisis which lead to stock markets fall all over the world. Those invested at such distressed valuations when the risk is low have made tremendous gain in subsequent years.

Hence the core focus should be on process, Asset allocation, being discipline and determined. And most important trait is do not carried away by Greed and Fear of the markets.

Don’t worry about the outcomes. The same is true not only in investing but holds true in other aspects of life.

             Feel free to write or call to me for further queries.

                          “The most important quality for an investor is temperament, not intellect.”- Warren Buffett