Mutual fund myths uncovered

Lower NAV is cheaper than higher NAV

This is one of the common myth about investment. People think that lower the NAV (Net Asset Value) better the fund compared to that with higher NAV. This may be true in the case of stocks as Rs. 50 stock has greater potential to grow faster than Rs. 5,000 stock. But in the case of mutual funds, it doesn't work this way.

NAV value in percentage terms matters than the absolute value. For example, if you invest Rs. 1 lakh in a fund with NAV of Rs. 10 and if the mutual fund performs great and in 3 years it doubles in value, then the NAV post 3 years would be Rs. 20 and your investment value would be Rs. 2 lakh. On the other hand, if you had invested the same amount with NAV of Rs. 1,000, still the effect would have been same as the NAV post 3 years would have been Rs. 2,000 and your investment value would have been Rs. 2 lakh.

Dividend option in mutual fund is better than growth option

When you go for investment in a mutual fund there are two options, one is dividend option and the other is growth option. There is one myth that dividend option is much better than that of growth option because there is an understanding that in dividend option investor is getting something extra. But that is not the case. After the dividend is paid, NAV comes down by a margin. In case if the fund is not an equity fund, then the dividend distribution tax is first paid by the AMC, which further lowers the returns. On the contrary in the growth option, the money remains in the fund itself.

Past returns in mutual funds indicate future returns

This is also one of the most common myths that people carry. Surely past returns would show you how the fund has performed in the past and there is a probability that it will perform the same in the future, but there is no surety or guarantee of the same. How the fund will perform in the future completely depends on the calls taken by the fund manager.