India 
The Blind Men and an Elephant - An Analogy with Mutual Funds
Most of you would have heard the story of ‘The Blind Men and an Elephant’. The story is about six blind folded men who were asked to guess what they were touching when blind-folded. Each of these six people were made to feel an elephant on different sides but none could guess the animal. Not only that, each one described the elephant’s body in a different way. The one who felt the ear called it a fan, the one who touched the tusk called it a spear, the legs were called a tree, the tail was called a rope, the stomach was called a wall and the trunk was called a snake – all of which were wrong guesses. The story is used to illustrate how perception about something varies from person to person and may lead to myths.
There is a subtle link of this story to mutual funds because mutual funds too carry a few misconceptions which are far away from reality. Let us look at how the same six men would have thought about mutual funds like they felt about the elephant and also try to bust the myths.
| How the blind men would have perceived Mutual Funds (Myths about Mutual Funds) | The Reality or Myth Buster | |
| 1. | Mutual funds invest in shares so they are risky | Not all mutual funds invest in shares and hence all mutual funds do not carry the same amount of risk. Those averse to equity shares may invest in debt based mutual funds. |
| 2. | You need a demat a/c to invest in mutual funds | It is NOT compulsory to have a demat a/c for investing in mutual funds. A demat a/c is mainly needed for trading in units of close-ended mutual fund schemes on the stock exchange. |
| 3. | Growth option delivers better returns than the Dividend option | These are options designed for the convenience of the investor. There is no variation in returns as underlying portfolios are the same. In fact, if one reinvests the pre-tax dividend proceeds back into the same scheme and calculates the returns, there will be no difference in NAV of these two options. |
| 4. | NFOs (News Fund Offers) are better than existing funds. | The biggest draw-back of an NFO or New Fund Offer is that they do not have a track record while all existing funds have a track record. A longer track record is better as it helps to provide insights into how the fund performed across market cycles. |
| 5. | Mutual Funds are only for experts. | Mutual funds are a mass product and most suited for beginners in the capital market. Even if you are not a financial expert, you will have access to someone who is (fund manager). With the fund manager’s expertise, the potential to make the right investment choice is much higher. |
| 6. | You need a lot of money to invest in mutual funds | Mutual funds aim to bring the capital market to the common man. The investment threshold for mutual funds is therefore very affordable at only Rs.500 per month through SIPs or Systematic Investment Plans. Imagine buying the most popular stocks at Rs.500 per month. |
The above 6 misconceptions about mutual funds can lead to misinterpretation like it did with the blind men. As mentioned above, mutual funds are simple and affordable products for the masses. They can be a means to achieve various life goals besides creating wealth in the long run, provided one follows a slow but consistent and long term approach. One of the best ways to do this is through a SIP or Systematic Investment Plan.
Information contained in this article is not a complete representation of every material fact and is for informational purposes only. The recipient is advised to consult its advisor/ tax consultant prior to arriving at any investment decision.
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