12 Mutual Fund Myths Every Indian Investor Should Stop Believing

Mutual funds are a popular investment vehicle in India, yet misconceptions about mutual funds often lead to poor investment choices. Some investors avoid them entirely because they believe only experts can participate. Others jump in expecting guaranteed returns, only to panic at the first sign of volatility.

These common myths about mutual funds persist because of half-truths passed around in family WhatsApp groups, social media reels, and casual conversations. The reality is that mutual funds are subject to market risks - as the familiar line goes, read all scheme related documents carefully before investing. Mutual fund returns are not guaranteed, but understanding how these products actually work can help you separate fact from fiction.

This article will bust 12 widespread fund myths for first time investors and experienced participants alike - especially those who think they need a large amount of money, a demat account, or in depth market knowledge to begin investing. Novelty Wealth, a SEBI-registered investment adviser (RIA) and portfolio analysis and advisory platform, has put together this guide to help investors make informed investment decisions. The goal here is education, not investment advice. We encourage you to match any mutual fund investment with your own financial goals, risk appetite, and time horizon.

How Mutual Funds Actually Work (Quick Refresher)

Mutual funds pool money from many investors and invest it in a portfolio of securities - equity shares, bonds, money market instruments, gold, or a combination - depending on the scheme type. This pooled corpus is managed by professional fund managers employed by asset management companies (AMCs), sometimes also referred to by investors as a mutual fund agency. The fund managers make buy and sell decisions based on the scheme's stated investment objectives.

As an investor, your role is to define your risk tolerance, time horizon, and financial objectives. You then pick a scheme category that aligns with those parameters.

A few key terms to know:

• NAV (Net Asset Value): The per-unit value of a fund's portfolio after deducting expenses
• SIP (Systematic Investment Plan): Investing a fixed amount at regular intervals (e.g., monthly)
• Lump sum: A one-time, single investment

Here is a simple example: if 1,000 investors each invest ₹5,000 in an equity fund, the AMC has a pooled corpus of ₹50 lakh. The fund manager uses this to buy a diversified basket of stocks. Each investor's holding is represented by units, and the net asset value per unit changes daily based on how the underlying assets perform.

Myth vs Reality: At-a-Glance Comparison Table

Before diving into each myth in detail, here is a quick reference table. Each of these common misconceptions is explained with examples in the sections that follow.

Myths About Returns and Risk

Most common myths about mutual funds stem from misunderstanding how risk and return actually work. None of the points below should be read as a recommendation to invest in any specific mutual fund scheme.

Myth 1: Mutual Funds Guarantee Returns

Expecting guaranteed returns from mutual funds is unreasonable. Mutual funds invest in market-linked securities - stocks, bonds, and other instruments - whose prices fluctuate daily. Returns from mutual funds fluctuate based on market conditions. During a strong year, an equity fund might deliver double-digit gains; during a volatile period like early 2020 (Covid-19), the same category could see steep declines.

SEBI regulations explicitly prohibit mutual fund schemes from promising or implying guaranteed returns. Calculators and illustrations you see online show assumed or illustrative return rates - they are not forecasts.

Here is how mutual funds compare to some other investment options:

The key takeaway: if someone promises you fixed returns from a mutual fund, verify their claim against the SEBI Mutual Funds Regulations.

Myth 2: SIPs Eliminate Risk

Systematic investment plans are a disciplined way of investing in mutual funds. You invest a fixed amount - say ₹2,000 per month - and benefit from rupee-cost averaging. When the market is down, your fixed amount buys more units; when the market is up, it buys fewer. This smooths your average purchase price over time.

But SIPs do not eliminate market risk. If the overall stock market falls 30%, the value of your accumulated units will also decline. Continuing SIPs during downturns can lead to better long-term gains because you acquire more units at lower prices - but that outcome is not assured.

Consider two investors:

• Investor A starts a SIP just before a market peak. The market drops 20% over six months; their portfolio is temporarily in the red.
• Investor B starts after the correction. Their average cost per unit is lower initially, but both face volatility going forward.

Things you should not assume about SIPs:

• SIP is not a separate product - it is a method of regular investing in a mutual fund scheme
• SIPs do not protect against sustained market declines
• The amount you invest via SIP is still subject to market risks

Myth 3: Past Performance Guarantees Future Returns

Many investors pick funds based solely on 3-year or 5-year return charts. But past performance does not guarantee future returns. SEBI and AMCs state this clearly in every scheme document and advertisement.

Market cycles create misleading trailing returns. A fund's performance during a bull phase can look dramatically different from the same fund during a correction:

Note: These figures are illustrative and do not represent any specific scheme.

Instead of chasing past high returns or predicting future performance, evaluate a fund's risk profile, asset allocation, expense ratio, and how it fits your time horizon and financial plan, and learn how to track mutual fund performance using risk and consistency metrics rather than headline returns alone.

Myth 4: Equity Mutual Funds Are Always "Very Risky"

Equity mutual funds do carry higher market risk than bank deposits. But calling all equity funds "very risky" oversimplifies things. SEBI categorises equity schemes into large-cap, mid-cap, small-cap, sectoral, thematic, and more. Risk varies significantly across these categories.

Mutual funds are inherently diversified across different stocks or bonds. A diversified equity fund holding 40–60 companies across sectors behaves very differently from owning a single stock on the stock market. If one company underperforms, others may offset the impact. This portfolio diversification does not eliminate systemic risk (when the entire market falls), but it does reduce the risk of any single holding derailing your investment.

Equity funds are generally considered more suitable for long-term investment goals where investors can ride out short-term volatility.

Myth 5: Debt Mutual Funds Are Completely Risk-Free

Many investors treat debt mutual funds as substitutes for bank fixed deposits. While debt funds tend to be less volatile than equity funds, they are not risk-free. Key risks include:

• Credit risk: If a bond issuer defaults or gets downgraded, the fund's NAV drops. The Franklin Templeton debt fund incident of 2020, where multiple schemes were wound up due to liquidity issues, is a well-known example.
• Interest-rate risk: When prevailing interest rates rise, existing bond prices fall. Despite RBI cutting the repo rate by a cumulative 125 basis points in recent years, 10-year G-Sec yields rose to approximately 6.89% by March 2026, pushing some debt fund NAVs down.
• Liquidity risk: In stressed markets, some bonds may be hard to sell at fair prices.

Here is a simplified comparison:

Debt funds are suitable for short-term financial needs in many cases, but investors should check the fund's credit quality, duration, and riskometer before investing.

Myths About Who Can Invest and How Much You Need

Some of the most damaging fund myths are the ones that stop people from even getting started. These myths create barriers that do not actually exist.

Myth 6: Mutual Funds Are Only for Experts

Mutual funds do not require in depth market knowledge to invest. They are specifically designed so that non-expert investors can access professionally managed, diversified portfolios. Fund managers handle investment decisions for mutual funds - researching companies, managing risk, and rebalancing the portfolio according to the scheme's mandate. However, professional fund managers do not manage your entire portfolio or personal finances; they manage the specific scheme you have invested in.

You do not need to be an expert to invest in mutual funds. Mutual funds are suitable for all types of investors. What you do need is clarity on:

• Your financial goals (e.g., child's education, retirement, home purchase)
• Your risk appetite and how much drawdown you can tolerate
• Your investment time horizon

SEBI-registered intermediaries, including RIAs like Novelty Wealth, can help investors plan and analyse portfolios. Beginners can start investing with simpler, broad-based categories like index funds and gradually build understanding over time. Investors only need to decide their risk appetite and goals - the professional experts at the AMC handle the rest within the scheme's mandate.

Myth 7: Mutual Funds Require a Large Amount of Money

This is one of the most persistent common misconceptions. Many mutual fund schemes allow SIPs starting from ₹100–₹500, depending on the scheme and platform. There is no need to wait until you have a large amount saved up.

SIPs allow investments with low monthly contributions, making systematic investment plans a disciplined way to build long-term wealth and mutual fund investment accessible to almost anyone with a bank account and completed KYC. No maximum investment amount is required for mutual funds either - there is effectively no upper limit for most open-ended schemes, though allocation should align with your financial plan and risk capacity.

Consider a young professional who starts with a ₹1,000 per month SIP. Even this minimum amount, increased by 10% each year as income grows, can build a meaningful corpus over long durations through the power of compounding. Waiting five years to accumulate a large lump sum means missing out on those early years of potential growth. Beginners can start investing with as little as Rs. 500 and increase gradually.

Myth 8: You Need a Demat Account to Invest in Mutual Funds

You do not need a demat account to start investing in mutual funds. In India, mutual fund units can be held in "statement of account" mode - a simple record maintained by the AMC or registrar. Holding mutual fund units in a demat mode is optional and is chosen by some investors who want to consolidate equity and mutual fund holdings in one place.

The actual requirement is completing your KYC (Know Your Customer) process. KYC must be submitted with the mutual fund application and typically requires your PAN, Aadhaar, identity proof, address proof, and a recent photograph. E-KYC allows for a paperless verification process, making it quick and convenient. KYC is a one time exercise - once completed through central KYC, it does not need to be repeated for each investment or new AMC. KYC helps prevent money laundering and financial terrorism, which is why it is mandated by regulators.

Platforms like Novelty Wealth can read your existing mutual fund holdings through Account Aggregator or CAS data for portfolio tracking, even if your investments were made elsewhere.

Myth 9: Mutual Funds Are Only for Long-Term Investors

Mutual funds are goal-based and offer options for short-term and long-term investments. While equity funds tend to perform better over longer time horizons, there are categories specifically designed for shorter time frames:

• Liquid funds and overnight funds: are often considered by investors for parking emergency funds or cash needed within a few months
• Ultra-short and short-duration debt funds: Suitable for needs arising in 3–12 months
• Hybrid funds: Can serve medium term goals depending on risk tolerance

Mutual funds can be invested in short, medium, or long durations. Investors can choose between short-term, mid-term, and long-term investments based on when they need the money. Open-ended mutual funds are highly liquid and allow investment redemption at any time (subject to exit loads, if any, and applicable taxes).

The time horizon should guide what type of mutual fund category to consider - not the other way around, and this also influences whether a SIP or lump sum investment approach is more suitable for a given goal.

Myths About NAV, NFOs, and "Cheap" Funds

Many first time investors confuse a fund's NAV with a stock price and treat New Fund Offers (NFOs) like IPOs. Understanding net asset value correctly is essential when comparing schemes and avoiding costly misconceptions.

Myth 10: A Low NAV Means a Fund Is Cheaper

The net asset value of a fund is calculated as: (market value of all portfolio securities − expenses and liabilities) ÷ total number of units. It is a per-unit accounting figure, not an indicator of whether a fund is "cheap" or "expensive."

Here is a simple example:

Both investments grow by the same percentage and deliver the same absolute return. The number of units you hold is irrelevant - what matters is the underlying assets, expense ratio, risk profile, and the fund's performance relative to its benchmark and category.

Myth 11: NFOs Are Better Because They Start at ₹10

A New Fund Offer (NFO) is the first-time subscription period when a new mutual fund scheme is launched. The ₹10 face value is simply an accounting convention - it does not mean you are getting a bargain.

An existing fund with a NAV of ₹200 is not more "expensive" than an NFO at ₹10. What matters is percentage growth:

• NFO at ₹10 growing to ₹11 = 10% gain
• Existing fund at ₹200 growing to ₹220 = also 10% gain

NFOs also carry additional uncertainties: the fund has no track record, the portfolio is being assembled for the first time, and there may be restrictions during the initial period.

Investors should evaluate the scheme's investment objectives, risk factors, costs, and suitability for their goals rather than focusing solely on the launch price.

Myth 12: More Mutual Funds Means Better Diversification

Owning 15–20 mutual fund schemes does not automatically make your portfolio safer. If most of those are large-cap equity funds, they likely hold many of the same stocks. You end up with duplication of holdings, higher paperwork, and more complexity - without meaningful additional diversification.

Effective portfolio diversification means combining different asset classes and strategies (equity, debt, international exposure, different market-cap segments), not simply adding more schemes of the same type.

• Investor A holds 2–3 well-chosen, diversified funds across equity and debt. Portfolio is simple to monitor, with minimal overlap.
• Investor B holds 15–20 funds but discovers that many share the same top holdings. The added complexity does not reduce risk meaningfully.

Tools offered by platforms like Novelty Wealth can help investors detect concentration and overlap across schemes by analysing underlying holdings - making it easier to identify redundancy and analyse your mutual fund portfolio in a structured way.

Myth 13: Direct Plans and Regular Plans Are the Same

SEBI mandates that every open-ended mutual fund scheme must offer two variants: a direct plan and a regular plan. The underlying portfolio is identical - same fund manager, same stocks or bonds, same investment objectives. The only difference is cost.

• Direct plan: Investor invests directly with the AMC or through a SEBI-registered RIA; expense ratio excludes distributor commission
• Regular plan: Includes distributor commissions; higher expense ratio

The expense ratio gap for actively managed equity funds can range from 0.5% to 1.5% per year. For index funds and liquid funds, the gap is smaller (0.1%–0.3%).

Here is an illustrative example of how this cost difference compounds:

Assume a ₹10 lakh investment, a gross return of 10% per year (illustrative, not assured), and a 15-year horizon. A direct plan with a 1.0% expense ratio and a regular plan with a 1.7% expense ratio would produce noticeably different outcomes over time, purely because of the cost drag. These figures are illustrative and not indicative of future returns.

Choosing between direct and regular should depend on whether you are comfortable managing investments yourself or prefer guidance through a distributor. Neither option is universally "better" - it depends on your needs.

Why Mutual Fund Myths Persist

Even with widespread access to information, myths about mutual funds remain stubbornly common in India. Several behavioural biases and information gaps drive this:

Behavioural biases:

• Anchoring bias: Fixating on a ₹10 NFO price or a past return figure as the sole decision-making anchor
• Recency bias: A recent market crash or rally disproportionately shaping all future expectations
• Herd behaviour: Investing because friends or relatives are doing so, without evaluating suitability
• Loss aversion: Fear of seeing even temporary negative returns, leading to avoidance of market related investments entirely

Information gaps:

• Misleading social media posts or unregulated tips that promise higher returns without disclosing risks
• Confusion between different products like IPOs vs NFOs vs FDs
• Over-reliance on informal advice from peers instead of reading SEBI/AMC scheme related documents

Apps and platforms like Novelty Wealth aim to reduce information asymmetry by giving investors a consolidated, data-driven view of their portfolios and simplifying mutual fund tracking and monitoring. But tools alone are not enough - investors should verify claims on official sources such as SEBI, AMFI, and the scheme information documents (SID, KIM) before acting.

Using Mutual Funds in Your Financial Planning

Rather than treating mutual funds as isolated investment options, connecting them to specific financial goals creates clarity and discipline. Your financial goals and market conditions change over time, which is why regular portfolio reviews are essential for mutual fund investors. Investors must periodically review their investments to avoid losses from misalignment, and periodic reviews help ensure investments align with financial goals.

Here is how different goals might map to different time horizons:

Note: The suitable product mix should be decided based on proper advice, self-study, and individual circumstances. This table is for educational purposes and does not constitute a recommendation for any specific category, scheme, or allocation.

Novelty Wealth's NovaAI can help investors track these goals, cash flows, tax implications, and existing mutual funds in one dashboard, acting as an all-in-one portfolio tracking solution for Indian investors. However, the platform does not guarantee performance or recommend specific schemes. Your investment journey should start with clarity on goals and risk capacity - the rest follows from there.

Conclusion

Investing in mutual funds does not require expert skills or a large amount of money to start. As we have seen, myths about guaranteed returns, zero-risk SIPs, cheap low NAVs, or "more funds equals more safety" can derail sensible investing and lead to poor choices. Understanding how mutual funds really work - as market-linked, professionally managed, and regulated products - helps investors align them with their own financial goals and risk capacity.

Before you start investing or make changes to your portfolio, read scheme related documents carefully, understand the costs (especially the expense ratio difference between direct and regular plans), and assess the various factors that affect a fund's performance. If needed, seek qualified, SEBI-registered advice.

Novelty Wealth, as a SEBI-registered RIA and wealth management platform and portfolio tracking solution, can support informed decision-making by consolidating your holdings and providing analytics across mutual funds, stocks, and other assets. It does not promise returns or make specific investment recommendations. The responsibility for making informed investment decisions - and for staying invested through market cycles - rests with you.

Disclaimer: FW Fintech Private Limited (Novelty Wealth) is a SEBI Registered Investment Adviser (SEBI Registration No: INA000019415). This content is for informational & illustration purposes only and does not guarantee returns. Investments in securities market are subject to market risks.

Frequently Asked Questions (FAQs)

Q1: What is the minimum amount of money needed to begin investing in mutual funds in India?

Many schemes allow SIPs starting at ₹100–₹500 per month. The exact minimum amount depends on each scheme's rules and the platform you use. There is no need to wait for a lump sum - you can begin investing with small, regular contributions and use an online SIP calculator to estimate future corpus and plan goals.

Q2: Do I need a demat account to invest in mutual funds?

No. Mutual fund units can be held in statement-of-account mode without any demat account. Demat is optional and preferred by some investors for consolidation. Many platforms and AMC websites support non-demat investments.

Q3: Are mutual funds safer than stocks?

Mutual funds offer diversification across many companies, which can reduce the impact of any single stock's poor performance. They are also managed by professional fund managers. However, mutual funds are still exposed to market risks and are not "safe" in the way a bank FD is. Risk levels vary across categories.

Q4: How do I choose between equity funds, debt funds, and liquid funds?

Connect your choice to your goal timeline, risk tolerance, and liquidity needs. Equity funds are often considered by investors for longer-term goals, depending on risk tolerance and individual circumstances. Debt funds may suit short to medium term needs. Liquid funds work for parking money needed within weeks or months. Avoid choosing based solely on which option promises higher returns.

Q5: Can I stop or change my SIP at any time?

In most open-ended schemes, you can pause, increase, decrease, or cancel your SIP without penalties. However, check for exit loads (fees charged if you redeem units within a specified lock in period) and understand the tax implications of any redemptions.

Q6: How often should I review my mutual fund portfolio?

Review frequency depends on your goals, circumstances, and portfolio complexity. At minimum, consider reviewing when your income, goals, or life situation changes significantly. Avoid reacting to every short-term market move - but do not ignore your portfolio for years either.

Q7: Is it better to invest lump sum or via SIP?

Both approaches have merits. Lump sum investing is commonly used when investors have a larger amount available for investment. SIPs spread your entry points over time and suit regular investing from monthly income. Suitability depends on fund availability, market conditions, and your comfort - neither is universally superior.

Q8: Are mutual fund returns taxable?

Yes. Tax treatment differs for equity-oriented vs non-equity funds and for short-term vs long-term capital gains. Tax rules change periodically. Consult a qualified tax professional for advice specific to your situation and the applicable financial year.

Q9: How can Novelty Wealth help me with my mutual fund investments?

Novelty Wealth is a SEBI-registered RIA offering portfolio tracking, goal-based planning, expense ratio analysis, and overlap detection across your mutual fund holdings, making it easier to track and monitor mutual funds in one place. It consolidates data from multiple AMCs through Account Aggregator and CAS integration. It does not assure or guarantee returns on any investment.

Q10: Where can I verify information about a mutual fund scheme?

Always check official sources: the AMC's website for the Scheme Information Document (SID) and Key Information Memorandum (KIM), SEBI's website for regulatory updates, and AMFI's portal for standardised scheme data. Consolidated Account Statements (CAS) from CAMS or KFintech show your actual holdings. Do not rely solely on social media or informal advice for for mutual fund fact-checking.