The lack of proper financial education creates fertile ground for the proliferation and acceptance of financial myths. Although the prevalence of these myths or misconceptions prevents many consumers from making optimal financial decisions, falling for some of them can have long-term negative consequences for your financial health.
Here are some of the top money myths investors should avoid for their financial well-being.
Mutual funds with lower NAVs are cheaper
This has been around since the Indian mutual fund industry began to develop in the 1990s. Many retail investors mistakenly believe that mutual funds (MFs) with lower net asset values (NAVs) are cheaper. This misconception is often used by many to promote New Fund Offerings (NFOs) as their shares are issued at a face value of Rs 10.
However, the net asset value of an MF is determined by several factors. For example, because a fund’s NAV is determined based on the market value of its investments, the NAV of a well-managed fund may grow faster than other funds, resulting in a higher NAV with time.
Likewise, the new MFs have lower net asset values than the old ones because the former have had less time to develop. Therefore, using NAVs as the determinant for fund selection may result in investors ending up with underperforming funds. Instead, mutual fund investors should use the past performance of the funds, the ability of those funds to meet their financial objectives, and the prospects that those funds will exceed their benchmarks and similar funds as their primary metrics.
You are young? retirement can wait!
Investors in their 30s and 40s often postpone their retirement savings until old age. Instead, they prioritize other financial goals like buying a car or a house or saving for vacations. However, these people overlook the power of compounding.
The returns generated by their investment would begin to generate returns of their own, giving rise to larger corporations. For example, if a 30-year-old man invests Rs 10,000 per month in equity funds through Systematic Investment Plans (SIPs) for his retirement, he would accumulate Rs 3,490 crore in retirement when he turns 60, assuming a rate of return annualized. of 12%.
However, if they were to invest in a retirement scheme from the age of 45, they would need a monthly investment of around Rs 70,000 to build the same scheme at age 60, assuming the same rate of return. Therefore, starting retirement earlier would create a larger corpus with much lower contributions.
Mutual Fund Dividends Are Good
Dividends declared by MFs are mistakenly viewed by many investors as windfall profits. This leads them to opt for the dividend option while investing in mutual funds. What they don’t understand is that dividends are paid out of the fund’s assets under management (AUM), which is their investors’ money. As a result, the dividend-paying fund reduces its net asset value by the dividend paid. In addition, the amount of the distribution is calculated as a percentage of the nominal value of the fund and not the net asset value.
In addition, the dividend option is also tax-inefficient, as the dividends earned are taxed according to the investors’ tax brackets. Investors should therefore always go for the growth option and thus benefit from the power of compounding to build a larger corpus over a period of time.
I don’t have enough money to invest; it’s not worth trying
Young investors, particularly those in their 20s, and those with low savings rates tend to defer investing until they have accumulated a significant amount in their bank account. However, the minimum amount for a lump sum investment in most MF programs is only Rs 5,000. Similarly, the minimum amount for a SIP and additional lump sum investments is Rs 1,000 for most mutual fund schemes.
Many MF plans offer lower minimum investment amounts. With such a low threshold, you don’t need huge savings to invest in MF. Instead, people with lower savings rates should start investing in MF via SIP mode and benefit from the power of compound interest. As their income and savings rates increase, they should gradually increase the ticket size of their monthly SIPs.
Regular investment in SIP mode would create financial discipline, ensure Rs averaging costs by buying more units at lower NAVs during market corrections, and remove the need to invest time and monitor the markets.
Fixed Income Investments Are Better Than Stocks for Retirement Planning
Many investors tend to avoid stocks when investing for retirement. They generally tend to invest in fixed-income vehicles such as the Public Provident Fund, National Savings Certificate, Bank/Post Office Deposits, Kisan Vikas Patra, and Endowment Policies to build their retirement savings. However, returns on fixed-income instruments rarely exceed inflation rates.
Furthermore, establishing a post-retirement body is a long-term financial goal that preferably spans decades. Since the returns generated by stocks far exceed those of the fixed-income asset class and long-term inflation, stocks are the most suitable asset class for building a post-retirement body.
Therefore, investment contributions to a pension corpus should always be capital-intensive. Once an investor is two or three years from retirement age, he can gradually switch to fixed-income instruments depending on risk appetite, post-retirement costs, etc.