Common Misconceptions About Mutual Funds
Several common beliefs about mutual funds do not match how the product works. This lesson takes them in turn: beliefs about risk, about NAV, about who can invest, and about what a SIP or a fixed deposit can promise.
Beliefs about risk
"All mutual funds carry the same risk." They do not. Risk depends on what a scheme holds. It is shown on the scheme's riskometer, which has six levels, and for debt funds also in the Potential Risk Class matrix.
"Every mutual fund is mostly shares." Under SEBI's scheme categorisation of 26 February 2026, a conservative hybrid fund holds only 10% to 25% in equity, with the rest mainly in debt, while an aggressive hybrid fund holds 65% to 80% and small-cap and flexi-cap funds at least 65%.
"Debt funds cannot lose money." Debt funds carry interest-rate risk, credit risk and liquidity risk, so their NAV can fall. At the other extreme, "you can lose everything" overstates the case: a diversified fund is unlikely to fall to zero, but its value can fall sharply and the time it takes to recover is not assured.
Beliefs about NAV
"A low NAV means a cheap fund." NAV is simply the scheme's net assets divided by the number of units. A low NAV does not make a fund cheap and a high NAV does not make it expensive, because the same amount of money buys the same share of the portfolio either way.
NAV therefore says nothing about value or future returns.
Beliefs about who can invest
"A large amount is needed." Each scheme sets its own minimum in its Scheme Information Document, and many accept small amounts.
"Only experts can invest." A fund manager runs the portfolio, but the investor still needs to understand the scheme's category, risk and costs.
Beliefs about certainty
"A SIP guarantees returns." A systematic investment plan spreads purchases over time. The returns still depend on the market, and the value of the units can be below the total amount invested.
"A fixed deposit always keeps its value." A deposit keeps its rupee value, but its real return is approximately the after-tax interest minus inflation, and that can be positive, near zero or negative.
Rules at a glance
The same deposit for two people (illustrative)
Two neighbours in Vadodara hold the same fixed deposit. Assume for the arithmetic that it pays 7% a year and inflation is 5.5%; cess is ignored. Mrs Desai's interest is taxed at 20% and Mr Rao's at 30%.
Her after-tax interest is 7% × (1 − 0.20) = 5.6%, so her real return is 5.6% − 5.5% = about +0.1%. His after-tax interest is 7% × (1 − 0.30) = 4.9%, so his real return is 4.9% − 5.5% = about −0.6%. Whether the deposit kept its purchasing power depended on tax and inflation.
Why a low NAV is not cheaper (illustrative)
- Made-up figures: Scheme A has an NAV of ₹10 and Scheme B an NAV of ₹100. Suppose both hold exactly the same portfolio. An investor puts ₹10,000 into each; stamp duty is ignored.
- Units: ₹10,000 ÷ 10 = 1,000 units of A; ₹10,000 ÷ 100 = 100 units of B.
- The portfolio rises 10%. NAVs become ₹11 and ₹110. Values: 1,000 × 11 = ₹11,000 and 100 × 110 = ₹11,000.
- If the portfolio had fallen 10% instead, NAVs would be ₹9 and ₹90. Values: 1,000 × 9 = ₹9,000 and 100 × 90 = ₹9,000.
Result. The investor holds ten times as many units of A, yet both holdings are worth the same after any move in the portfolio. The NAV level made no difference.
Key points
- Risk differs from scheme to scheme; the riskometer (six levels) and, for debt funds, the Potential Risk Class show it.
- Not all mutual funds are equity funds: a conservative hybrid fund holds 10% to 25% in equity.
- Debt funds carry interest-rate, credit and liquidity risk.
- A diversified fund is unlikely to fall to zero, but its value can fall sharply and recovery time is not assured.
- NAV is net assets divided by units; it says nothing about whether a fund is cheap or about future returns.
- A SIP spreads purchases over time; it does not guarantee a return.
Common misunderstandings
- A new scheme's ₹10 unit is not a bargain against an older scheme's higher NAV: ₹10 is a convention for new fund offers.
- A riskometer reading at the lowest level is not a promise of no loss: every category carries some risk.
- "Unlikely to fall to zero" does not mean protected: the value can fall sharply, and recovery time is not assured.
Questions people ask
Where can a reader see how risky a scheme is?
On its riskometer, which shows one of six levels, and for a debt scheme also in its Potential Risk Class.
Can the NAV of a debt fund fall?
Yes. Bond prices fall when interest rates rise, an issuer can default, and some holdings can be hard to sell. These are interest-rate, credit and liquidity risk.
Does a longer SIP make a profit certain?
No. A SIP spreads purchases over time, but returns depend on the market and are not guaranteed for any period.
What this lesson relies on
- SEBI Master Circular for Mutual Funds (20 March 2026) — riskometer, Potential Risk Class matrix, and Chapter 3 on scheme categorisation (SEBI circular of 26 February 2026)
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.