6 Mutual Fund Myths That Cost Indian Investors Money (And How to Think Instead)

Last Updated on April 23, 2026 by Hemant Beniwal

“In investing, what is comfortable is rarely profitable.” – Robert Arnott

When I started this blog in 2009, the most common questions I received were “what is a mutual fund?” and “how does an SIP work?” Basic awareness was the problem then.

That problem has largely been solved. India now has over 10 crore SIP accounts, monthly SIP inflows above Rs 25,000 crore, and a generation of first-time investors who have heard of Nifty index funds and expense ratios.

But awareness and understanding are different things. The most expensive mistakes I see in client portfolios today are not caused by ignorance of what mutual funds are – they are caused by deeply held myths about how they work. These myths persist despite access to information, because they feel intuitively correct.

Myth 1: Good Past Performance Means Good Future Performance

This is the most dangerous myth because it is half-true. Past performance is information – just not the information most investors think it is. It tells you something about a fund manager’s skill in a specific market environment. It tells you almost nothing about what will happen next.

The data is consistent: the correlation between a fund’s performance in one five-year period and its performance in the next five-year period is very low across most equity categories. The top-quartile large-cap fund of 2015-2020 was not systematically the top-quartile fund of 2020-2025. Category rotation, market cap cycle shifts, and manager changes mean that yesterday’s winner is often tomorrow’s laggard.

A more useful way to use past performance: look at consistency across cycles, not peak returns in a single period. How did the fund perform during the March 2020 drawdown? During the 2018 mid-cap correction? Consistent downside protection over multiple cycles is a better indicator of process quality than a single high-return number.

Myth 2: Mutual Funds Are Only for Long-Term Investment

This myth locks many investors out of genuinely useful short- to medium-term applications of mutual funds. Mutual funds span a return and risk spectrum from overnight funds (safer than a savings account for short parking) to small-cap equity (high risk, requires 7+ year horizon). They are not a monolithic category.

For money you need in 3-6 months: liquid funds or ultra-short duration funds are appropriate. They offer better post-tax returns than savings accounts for investors in the 30% tax bracket, with reasonable liquidity.

For goals 3-5 years away: hybrid funds or debt-heavy allocations can provide better risk-adjusted returns than FDs, especially for investors who plan their capital gains harvesting.

The rule is simple: match the fund category to the investment horizon. Equity funds for goals 7+ years away. Hybrid for 3-7 years. Debt and liquid for shorter horizons.

Myth 3: Higher-Rated Funds Are Better Investments

Fund ratings from Moneycontrol, Valueresearch, Morningstar, and CRISIL are useful inputs – but they are not crystal balls. They are backward-looking assessments of risk-adjusted returns over a specific period, using specific metrics.

The research is unambiguous: there is weak to no relationship between a fund’s current star rating and its future returns. A fund that earns five stars after a strong bull run phase may have simply been heavily exposed to the outperforming sectors of that cycle. When the cycle rotates, the same positioning becomes a liability.

The more useful framework: look at the fund’s investment process, the consistency of the fund manager’s application of that process across different market environments, and whether the fund fits your specific allocation need. A three-star fund with a consistent process may outperform a five-star fund with style drift over your investment horizon.

Myth 4: Lower NAV Means Better Value

This is perhaps the most straightforwardly incorrect myth – and it persists because it borrows logic from stock markets, where a lower price does sometimes imply better value relative to earnings. In mutual funds, NAV does not work this way.

NAV simply reflects the current market value of the fund’s holdings per unit. A fund with a NAV of Rs 15 and a fund with a NAV of Rs 150 – if both hold the same portfolio – will produce identical returns on the same invested amount. The number of units you receive is different; the return on your investment is identical.

What matters is not the NAV level but the change in NAV over time. A fund whose NAV grows from Rs 15 to Rs 30 (100% growth) has outperformed a fund whose NAV grows from Rs 150 to Rs 200 (33% growth). The starting NAV is irrelevant to this comparison.

Myth 5: Chase the Performing Theme or Sector

Every year or two, a sector becomes fashionable. Infrastructure in 2007. Pharma in 2014. IT in 2020-21. Defence in 2023-24. Each time, new fund launches follow the trend, and investors pour in near the peak.

The problem is structural: by the time a sector theme is visible enough to attract a new fund NFO and significant retail interest, it has usually already had its major run. Sector valuations at peak popularity are not cheap. And sector funds carry concentration risk that diversified equity funds do not.

The better approach: a well-diversified equity fund will naturally have exposure to performing sectors through its stock selection process – without requiring you to predict which sector will perform next. Theme-chasing substitutes pattern-recognition for genuine diversification and consistently disappoints in the long run.

Myth 6: SIPs Are Always Superior to Lump Sum

SIPs are an excellent mechanism for most retail investors – primarily because they automate the investment decision, remove the need for market timing, and build discipline. These are real and significant benefits.

But SIPs are not mathematically superior to lump sum investment in all market environments. In a rising market, a lump sum invested at the start outperforms a SIP spread over the same period – because every rupee is compounding for the full duration rather than staggered entry points averaging down into gains.

SIPs provide the better risk-adjusted outcome in volatile or sideways markets, which is most of the time. But the choice between SIP and lump sum should be informed by three factors: the current market valuation environment, your ability to tolerate near-term unrealised losses, and whether you have a cash surplus that is genuinely idle or is already serving another purpose.

For a lump sum windfall – a bonus, property proceeds, RSU vesting – a Systematic Transfer Plan (STP) from a liquid fund into equity over 6-12 months is often a sensible middle path: it preserves some lump sum efficiency while reducing concentration risk at a single entry point.

Read: How Healthy Is Your Mutual Fund Portfolio?

Mutual funds are excellent investment vehicles. But they work well only when investors hold correct mental models about them. Every myth on this list has a portfolio cost – and it compounds.

It is not a numbers game. It is a mind game.