Let’s speak of the unspoken truths about the mutual fund industry.
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The dividends that you receive from the mutual funds are not really “tax-free”
It might be tempting to choose the dividend mode on mutual funds, thinking that you are receiving tax-free income. Do note that the mutual fund houses have to pay something called a “dividend distribution tax” which ranges from 10% (effectively around 12 odd%) on equity schemes to around 29% on debt schemes. While you don’t have to pay this tax, the mutual fund house will deduct this from your returns only. We recommend choosing the GROWTH mode in most cases.
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Most mutual fund schemes mimic their benchmark index to a large extent. They are afraid to be seen as contrarian in the event of underperformance
This, however, is detrimental to the investor as he is paying the fund manager to outperform the benchmark. At Moneyjar, we research and recommend schemes that tend not to mirror their benchmarks very closely so that they can produce outperformance for our users.
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Historical indicators are not accurate indicators of future performance of mutual funds
While historical returns are the one metric that everyone in the industry uses in order to showcase the value of investing in a particular fund, it is one of the worst ways to make a decision about investing. DO NOT blindly choose funds based on past performance. Read more about this here.
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Balanced funds are not really balanced
Most balanced funds have an equity percentage higher than 65% (for taxation purposes) and have the mandate to increase this equity portion even further. We typically don’t recommend balanced funds. Instead, we advise you to figure out an appropriate debt/equity allocation and pure-play funds instead.
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A few balanced funds have used the tagline of an assured dividend of 1% every month This is just hogwash
If they don’t earn a sustainable return for the dividend yield, they pay the dividend out of your own principal. Think of it this way, you give ₹100 to Balanced Fund ‘A’ that promised an assured 1% dividend. If they have no gains, they still give you ₹1 as a dividend, while your investment value becomes ₹99!
Hope this provides some valuable insights about the mutual fund industry. We strongly believe that educators should be teaching personal finance management as a subject in school/college. Timely awareness is the only way one can make better investing decisions. Do visit our online investment platform, Moneyjar where we pick mutual funds for you to invest using a similar thought process.
Happy Investing!