Investing Blindfolded: Dangerous Mutual Fund Beliefs That Still Misguide Indian Investors

The Comfortable Lies We Tell Ourselves About Mutual Funds

There is something deeply reassuring about the idea that you are “doing the right thing” with your money. For millions of Indian investors, mutual funds have become that comforting choice. Easy to access, well-marketed, and recommended by everyone from your office colleague to your mobile app, mutual funds are now a default setting in the Indian investment mindset.

But familiarity often breeds complacency. Somewhere along the way, many of us have stopped questioning how we are investing — and started blindly trusting what we are investing in. The stories we repeat to ourselves — “SIP is always safe,” “long term guarantees return,” “more funds mean more safety” — may sound wise, but are often half-truths. And half-truths in investing can be more dangerous than not knowing at all.

Let me be clear — I am not against mutual funds. In fact, I am a mutual fund investor myself. But over the years, I have realised that the way mutual funds are packaged and marketed often shapes perceptions that slowly become accepted as facts. Somewhere along the line, these perceptions harden into assumed realities — and that is where the real danger lies. Because this perceived reality is not always the actual reality.

In India, mutual funds have become the go-to investment for millions. Television ads and influencers glorify SIPs, diversification, and long-term investing. But behind this comfort lies a trap: many investors are making decisions based on half-truths. This article explores some of the most common and dangerous mutual fund beliefs that need serious rethinking — not to dismiss mutual funds, but to understand them better.

Money Vichara

1. Long-Term Investment Always Means Good Returns

“Just stay invested for the long term — you will make money.” This line is often repeated like a mantra in financial discussions. And while the long-term approach is generally sound, it is not a magical solution.

There are situations where the market may stay flat or range-bound for several years. If an investor enters at a market high, and the market remains sideways or even slightly declining for the next few years, their returns could be minimal — or even negative after inflation. Now imagine they need the money during that phase — say, for their child’s education or a medical emergency. There may not be enough time left for the market to recover, and they are forced to redeem at low valuations, locking in poor returns.

This is why it is dangerous to assume that time alone solves everything. Long-term investing should be coupled with smart entry, clear financial goals, and ongoing review. Otherwise, one could spend 7–10 years “waiting” and still fall short of expectations.

2. Systematic Investment Plans Automatically Reduce Risk

There is a common belief that SIPs — Systematic Investment Plans — make investing safe. Many think that by simply investing a fixed amount every month, they are avoiding all market risks. It feels like a safety net.

But SIP is a method of investing, not a magic wand. It helps average out purchase prices during ups and downs, but does not shield you from poor fund selection, wrong timing, or overexposure to volatile sectors. Also, While SIPs offer the benefit of disciplined investing, they do not always outperform lump sum investments, especially during sustained market uptrends. 

Timing matters, even in SIPs. If you start your SIP during a prolonged market high and the market goes into correction or stagnation, your portfolio may not deliver expected results for years. Moreover, just starting a SIP without thinking about asset allocation, risk tolerance, or rebalancing does not reduce risk — it only makes you feel like you are doing the right thing.

3. Owning Many Funds Means I Am Diversified

Many investors feel secure when they hold five, six, or even ten mutual fund schemes. “I have diversified,” they say. But a closer look often reveals that these funds are not as different as they seem.

Large-cap mutual funds from different companies may all invest in the same top 10 stocks — Reliance, Infosys, ICICI Bank, and so on. The same story repeats with midcap and multicap funds. Despite holding multiple funds, the investor is heavily concentrated in the same few companies, with no real diversification across sectors or asset classes.

True diversification involves spreading across asset classes (equity, debt, gold, international equity), investment styles (value, growth, index-based), and risk levels. Without this, an investor may believe they are safe, when in fact they are just repeating exposure multiple times over.

4. Debt Funds Are Always Safe

Debt mutual funds are often positioned as the safer cousins of equity funds. This has led many conservative investors — especially retirees — to put their savings into debt schemes assuming low risk and predictable returns.

But not all debt funds are equal. Credit risk funds invest in lower-rated bonds and carry the risk of default. Even in corporate bond funds, interest rate risk can impact returns — especially when interest rates rise, bond prices fall, reducing fund value. We have also seen real-life examples in India where well-known fund houses had to restrict redemptions in some debt schemes due to credit events.

Debt funds are not fixed deposits. They have market-linked risk, and sometimes, poor liquidity. Before investing, one must understand the kind of debt instruments the fund is holding and whether those match one’s investment horizon and risk tolerance.

5. Mutual Funds Are Less Volatile Than Stocks

This assumption arises from the idea that mutual funds are managed by professionals and are “less aggressive” than direct stocks. But that does not mean they are immune to volatility.

Equity mutual funds, whether actively or passively managed, are made up of stocks — and they move with the market. A small-cap fund can be just as volatile, if not more, than an individual small-cap stock. Even balanced funds or hybrid funds can show significant NAV fluctuations during uncertain market phases.

The comfort of being in a “mutual fund” often blinds investors to the underlying exposure. Risk does not disappear — it is simply packaged differently. Investors must choose fund categories aligned with their risk appetite, and not assume that the mutual fund format somehow softens market behaviour.

 6. Mutual Funds Cover All My Asset Allocation Needs

It is easy to think that once you have a mix of equity and debt mutual funds, your portfolio is complete. After all, mutual funds offer exposure to multiple segments — right?

Not quite. Most retail investors tend to stick to domestic equity and debt funds, missing out on important diversification opportunities such as gold, international equities, or even real estate investment products. These asset classes behave differently under varying economic conditions and can provide stability when domestic markets are under stress.

Depending solely on mutual funds can leave one overexposed to local market trends. For example, during times when the Indian market underperforms and the rupee weakens, international assets or commodities like gold could offer much-needed balance. Mutual funds should be the foundation — not the entire building.

7. Past Returns Will Repeat in the Future

Many people pick a fund based solely on its past returns. A fund that delivered 20% in the last year is expected to continue the same performance going forward. But markets do not move in straight lines, and past winners are often tomorrow’s laggards.

A fund may have done well in a bull phase, but may struggle when the economy shifts or the sector it focused on falls out of favour. Chasing past returns can also mean buying into a fund when it is already expensive or overvalued.

Good investing involves looking beyond numbers — understanding how a fund operates, its consistency, risk measures, and how it fits into your overall strategy. Performance without context is just a number.

 8. Fund Managers Are Experts Who Will Always Deliver

There is a lot of faith placed in fund managers — and rightly so, they are trained professionals. But it is dangerous to assume that they are infallible.

Fund managers work within constraints — mandates, sectoral limits, and changing regulations. They also deal with human limitations — biases, market noise, and pressure to perform. Not every decision is perfect, and not every fund manager stays consistent.

Relying blindly on fund managers often leads to disappointment when a scheme underperforms. It is better to monitor the fund regularly, understand the rationale behind its holdings, and be ready to move on if it no longer meets expectations — rather than hoping expertise will always save the day.

9. Mutual Fund Returns Equal My Returns

When a fund says it has delivered 12% annual return over five years, most investors assume that they too earned the same. But in reality, individual investor returns often vary widely.

Why? Because most people enter and exit at the wrong times. They invest after a strong rally and withdraw during a correction. Moreover, factors like expense ratios, exit loads, transaction costs, and taxes further eat into actual returns. Even the specific day you invest or redeem can affect your return.

The difference between a fund’s return and an investor’s return is often called the “behaviour gap.” Avoiding this gap requires discipline, patience, and staying invested through cycles — not reacting emotionally to every market move.

10. Big AMCs Are Always Safe and Ethical

Many investors believe that large Asset Management Companies with big advertising budgets and high brand recall are automatically more trustworthy. But size does not guarantee ethics or competence.

Even well-known AMCs have faced issues in India — from misjudging credit risk to miscommunicating fund objectives. Regulation provides a safety net, but no system is perfect. Blind trust can lead to misplaced loyalty, even when a fund no longer suits your needs.

It is important to read fund documents, check performance and transparency, and be an active participant in your investment decisions — regardless of how big or popular the fund house is.

Invest With Eyes Wide Open

Mutual funds remain one of the most powerful tools for wealth creation in India. They are accessible, regulated, and come in different forms to suit different needs. But true financial wisdom lies in seeing beyond packaging.

As investors, we must question popular narratives, understand the products we buy, and match them to our real-life goals and timelines. Being cautious does not mean being fearful — it means being better informed. Believing that long-term guarantees returns, or that SIP removes all risks, or that fund managers can never go wrong — these assumptions may offer comfort, but not clarity. And clarity is what leads to good financial decisions.

The real risk is not in the market — it is in believing that we do not need to learn anymore. Investing should be a conscious act, not an automatic one. Question your beliefs, revisit your strategy, and invest with your eyes wide open. Because in the world of mutual funds — what you do not know can cost you more than what you do.