The myths of mutual fund investing

by | Dec 15, 2017 | 0 comments

Somewhere I read, unlearning is as important as learning. Our brains are hardwired to conclude quickly to reduce stress. If it ends up concluding incorrectly, it is bound to stay ingrained in our brain forever unless we
effort to change it. Today’s objective is to cover few common myths of investing which we may have been carrying for decades.

MYTH #1: There are “secrets” to successful investing that most people don’t know

Yes, there is a secret to successful investing. It is called “Investing”. Sorry for being sarcastic but there isn’t really a secret that anyone can share. From what I have read so far from the books and the experiences of successful
investors is that, they all possess some common traits. First, they are disciplined. Second, most importantly, they have extreme patience. It is also true that you need to have some fundamental knowledge about investing, if you want to follow DIY (Do It Yourself) mode. You can gain that knowledge easily by reading just 20-30 mins a day about investing. Investing in mutual funds just offers you diversification at low cost.

MYTH #2: Investing in Equity is very risky

Equity investing can be risky but so is swimming, motor-cycle riding and these days even breathing the Delhi air. We don’t stop doing any of that, do we? We have been taught by our parents/professionals to manage these risks, so we have outgrown that thinking. The sad part is that we have never been taught by our parents/professionals on how to handle money, how to save and how to invest. That makes the grown-up think investing is risky. Besides, what comes to your mind when you think of risk? I bet it is the probable loss or the volatility. Our equation of risk goes something like this. Risk = Volatility = Loss.

Let’s look at the following daily Sensex chart for a 25 yrs period.

Let me make my point by asking a question here. How long is the coastline of India? The official answer is 7,517 Kms. Do you think if a person walked this entire shore-line, will he come up with the same answer? How about an ant? Will an ant give you the same answer? If you flew the same coastline on an aeroplane, will you give the same answer? Probably not. I am guessing all answers are going to be very different from the official answer. An ant probably might give you the highest number, as it sees every nook and corner of the shore and measures in terms of millimeters. A person might give some number which could be less than an ant coz he would probably measure distance in feet. When you fly an aeroplane, you measure in miles so your answer could be far lesser than the official answer. Market volatility is bit like this. If you be an ant and track it every day and start taking decisions based on daily events, then you are going to end up stressed and take wrong decisions. Inaction in investing is of utter importance. Give it time and let the money do its work. No doubt investing is risky, but the biggest risk one can take is…not investing at all.

MYTH #3: Fund with Low NAV is cheaper/better

A typical myth. Many people have asked me why are my recommended funds having high NAV and why didn’t I choose the lower ones. “The NAV is just Rs.10” is just a sales pitch and surprisingly investors flock to it thinking it’s cheap.

NAV of a fund is totally irrelevant and should never be considered for making investment decisions. Confusions arise because investors view NAV like a stock price. Consider two funds with the same stock portfolio. One is a newly launched fund (A) and has a NAV of 10 while another one (B) has been in the market for much longer time and has a NAV of 500. The value of their holdings rises and after a few days, you see the fund A is at 11 and B is at 550. Although it appears that A has just gone up by a rupee while B is up by 50, they both equate to 10%. NAV is nothing but Net Asset divided by the number of Units. This has no bearing to the fund performance or the cheapness whatsoever.

So, if someone comes up to you with an investing rationale of low NAV, you know what to do.

MYTH #4: Mutual funds are the way to get rich quick

If someone tells you that the investing in mutual funds or in stocks will make you rich quick, run for covers. “When promised with quick returns, respond with a quick NO”, says the investing guru Warren Buffet.

We have seen many people fall for money scams. Why? Because they are greedy. They want to get rich quick. That’s why people buy lottery tickets. Govt has never lost money selling lottery tickets but people did by buying

If we understand the basics of finance and set our expectations right, our probability of making financial mistakes goes down by 99.99%. Let’s leave 0.01% to Act of God.

So, over a period of 20 years, you can expect an aggregated return (CAGR) of 13-18% from Equity, 9-12% from debt, 6-10% from Gold. There is no baseline data for real estate, so I have no idea.

Over last 20 years, equities have beaten other asset classes hands down. Bill Gates once said, “Most people over estimate what they can achieve in 1 year and grossly under-estimate what they can achieve in 10”.


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