Did you know that in 2024, the investment share of individual investors in the industry assets of Mutual funds went up to 60.1% from 57.3% in 2023? Despite the impressive investment returns of mutual funds, a growth of only 2.8% in individual investor shares seems surprising.

Putting things into context, the number of individual investors went up from 19 million to 40 million in less than a decade. This number, though impressive, when compared to the country’s 1.4 billion population, begs the question: Why are more people not investing in mutual funds? 

The answer is simple yet perplexing. One of the biggest reasons people do not invest is the vast number of misconceptions about mutual funds. Read this article till the end. It will cover some of the most common myths about mutual funds.

Top 10 Myths About Mutual Funds

From the local tea shop outside your office to your friend circle, the gossip about mutual funds never stops. This spread of misinformation leads to many misconceptions about mutual funds. Some of the top myths about mutual funds are:

1. Investment in Mutual Funds is Just an Investment in the Stock Market

Mutual funds do not invest just in the stock market. The basic idea of mutual funds is to combine funds from multiple investors to invest in a portfolio of multiple and diverse investments. They can be anything ranging from equity to debt to hybrid funds.

2. Lock-in Period

“Once you put money in mutual funds, it is tied up for so many years.” This is one of the most common misconceptions about mutual funds. Yes, some mutual funds do have lock-in periods, but not all of them. The lock-in period depends upon the type of fund, and the majority of funds comprise flexible liquidity options.

3. Debt is Better Than Equity

People end up comparing two kinds of mutual funds: one that invests in debt instruments and another in equity. There is no way to judge which is better as they cater to very different needs. 

Some people prefer debt mutual funds because they offer more stability and lower risk. Equity Mutual Funds attract investors by offering higher potential returns, however, they have an inherently higher risk profile.

4. You Need to be Rich to Invest in Mutual Funds

This is one of the most common misconceptions about mutual funds. This can be completely eliminated by just one simple fact. You can start a SIP with as little as ₹100.

5. Mutual Fund Guarantee Returns

Always remember that mutual funds’ performance depends on the state and fluctuation of the markets. Yes, in the past, over longer investment horizons equity funds have provided inflation-beating returns but that is due to the performance of the underlying instrument. Given the inherent risk of equity, it cannot be guaranteed that it will always continue to make returns. (Calculate Returns using our SIP Calculator)

6. Mutual Fund Investments are Tax-Free

This is another widespread misconception about mutual funds. There is no law or exception in the tax codes that says mutual funds are tax-free. Gains made on Mutual fund investments are subject to taxes. According to the law, they attract either long-term capital gains (LTCG) or short-term capital gains (STCG) tax based on the holding period. 
There are some tax benefits, such as LTCG up to ₹1,25,000 is tax free, however gains on mutual funds are not tax-exempt.

7. Every Time you Invest in a Mutual Fund, you need to do Your KYC Again

Yes, you must complete KYC (Know Your Customer) once before investing in Mutual Funds. But you do not have to do it repeatedly. KYC is a one-time process rule for all investors. You need to provide it as proof. E-KYC makes it easier as online platforms allow you to do it without paperwork. 

8. Demat Accounts are a Must for Mutual Funds

You do not need to open a demat account to invest in Mutual Funds. On PhonePe, you can start investing in Mutual Funds by just completing your KYC.

9. If it Paid Well Before, it Will pay Well Again

Even though a lot of awareness is being raised about investment strategies, the phrase “it had high returns before, so it will have high returns again” is still being used by many people. While useful for studying and understanding patterns, past investments do not guarantee future returns in any way, form, or shape. 

Returns are solely based on market fluctuations. Thus, this misconception about mutual funds can lead to poor investment decisions.

10.  To Invest in Mutual Funds, you need to do a lot of Documentation

Contrary to this misconception about mutual funds, the paperwork needed to invest in a mutual fund is actually quite simple. To invest in Mutual Funds, you only need a a phone with a good internet connection, proof of address and, proof of identity (PAN).

These little misconceptions about mutual funds is responsible for keeping numerous interested investors away.

Read more: Best Mutual Funds to Invest in for 2025

Conclusion

Investing in mutual funds is a great way to build long-term wealth. With the above misconceptions about mutual funds out of your way, you can make smart financial decisions regarding your future. However, do not compromise on your research on mutual funds before investing your hard-earned money into them.

FAQ’s

Is Investing in Mutual Funds Risky?

While all investments carry some risk, mutual funds offer diversification, which helps mitigate risk. Mutual funds aim to minimize the impact of market shifts on individual holdings by diversifying their investments across many assets.

Can you Lose all Your Money Invested in Mutual Funds?

While it is possible to experience losses in mutual funds, the risk of losing all your money is relatively low, especially if you have a diversified portfolio. Investing for the long term and staying current on market developments might help reduce possible losses.

Are Mutual Funds the Same as Stocks?

No, mutual funds and stocks are different. Mutual funds pool money from multiple investors to invest in a diversified portfolio of assets. On the other hand, stocks represent ownership in a single company. Mutual funds offer diversification and are managed by professional fund managers.