Trust and faith are two incredibly important factors that make a good investment. Before making any investment decisions, spend ample time going through the pros and cons of what you are considering. Investment myths are perpetuated to harm investors and they should be wary of the same. Let’s have a look at a few of these myths:
Money lost if fund house shuts down
This investment myth needs to be done away with. There is no need to get worried about your funds or fund house shutting down. Mutual funds are handled by asset management companies (AMCs). AMCs make money by way of a charge that is based on the worth of units owned by you. An AMC is not a broker or an invest bank. AMCs just handle a money from consumers in return for a small free.
The money handled by mutual funds belongs to the investors constantly; it does not mix with the AMC’s corpus. For example, SBI Capital is different from SBI bank and operates as an independent AMC. If there was to be a situation where your mutual fund house or AMC was to wind up, you would be entitled to receive your investment amount back. This amount would be calculated based on the present NAV. The amount that you have invested in the mutual fund house is safeguarded by a trust at all times.
One hindrance is that the repayment amount could take a while to reach you as the process is slow. Poor fund management can result in loss for investors. That sadly remains a possibility in spite of the Securities and Exchange Board of India’s (SEBI) regulations in regard to mutual funds. SEBI’s regulations may be strict but the best way to combat high risk levels is diversification.
You can make quick money with stocks
Most people believe that trading stocks in the share market can result in a quick turnaround and high profits. They think they can make twice, thrice amount of money by hedging their bets on the stock market. This is a huge myth as it could not be farther from the truth.
In equity investment, shares only give good returns after a long period of time. Most times it takes at least five to ten years for your stocks to bear great profits. The patient investor always excels with returns.
Also, certain stocks have a high alpha and give exceptional multi-bagger returns. But there are certain stocks which provide negative return even with good fundamentals and they just need to be in the portfolio for the long term to generate good steady income.
However, if you consider the entire portfolio of all stocks across timeframes, it will surely confirm what Benjamin Graham had said in his book, The Intelligent Investor,
“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
Stock investment is a very good option provided you buy the company and not just its stock and then behave like one of the owners, owning and believing their ideology and trusting the fundamentals. So, analysis needs to be done before investing and not afterwards.
Stock market is extremely risky
Consumers associate the stock market with absolute risk. They must look at the intricacy of the markets as a tool to leverage. Even though trading in stocks may be perceived as too tough, if you follow the rules, great returns are possible. Research in the stocks you are investing in and keep your eye on the market. Diversify your holdings and be patient with your investments. Over time risk can be mitigated while trading in the stock market.
You get your money’s worth
With various diverse mutual funds, countless portfolio managers and several life insurance companies, it is difficult to guarantee that what you get is what you pay for. Most would charge the same kind of free to manage your money but you may not get the best service with all of them. Your portfolio manager could be bad, corrupt or great; the outcome depends on your due diligence and pure luck.
The true value of your fund will not be realized if it is managed by a bad portfolio manager. Hence, you always have to be vigilant to ensure your money is put to good use. Truth is, there is a possibility that you would be sold an investment service or product that is touted as being the best option for you.
The human touch is integral for investment advice
Investors believe in taking advice from those they think know better about the investment process. Often these people who they take advice from tend to be fund managers. The fund managers will often function in line with their personal interests.
To counter this you may try algorithm driven recommendations that focus on objectivity. For example there is an application called Fisdom, where the algorithm helps in creating a portfolio by allowing the investor to define objectives, filter through the fund options, analyzing performance and managing risk. These algorithms will probably replace most fund managers in the near future because of their independence from selfishness or desire for personal gain, unlike human fund managers.
Robo-advisory may or may not be able to perform better than the human interaction, but surely it will reduce the menaces of mis-selling, mis-information and wrong doings of the industry at large. So, as an investor, you need to have your basics at the right place and nothing can go wrong with your investments:
- Check your ideal and your current asset allocation, and yes, even at the cost of repeating, I would insist on Asset Allocation over and over again.
- Like Paul Samuelson said, Investment should be more like watching the paint dry or the grass grow; if you want excitement, go to Las Vegas.
- Investment should be analyzed before and reviewed afterwards and not the other way round.
- Skip the blips in the market and believe in the fundamentals of the economy and your investment analysis and continue.
- Review your investments yearly and change according to changing environment and needs.
Happy investing!
[tek_button button_text=”Download Fisdom App” button_link=”url:https%3A%2F%2Fbit.ly%2F2AZUb24||target:%20_blank|” button_position=”button-center”]
