Can Mutual Funds Make You Rich?

5 mins read

Everyone who starts investing in the stock market at one point does wonder how much time I will have enough to finally be rich! Therefore, an investor can also become susceptible to making wrong investment decisions in his eagerness to make a lot of money quickly.

So, can a person become rich by investing in mutual funds? Yes, it is possible! But T&C apply.

Difference between Being Rich and Financially Independent

There is a saying, “Rich value money, Wealthy value time”. Being Rich is arguably relative, while we can always strive to be part of the one per cent which in India is an annual income of Rs. 50 Lakhs, becoming financially independent gives you the freedom to do what you love while regular cash flows from your investments looking after your basic needs.

Thus as everyone’s definition of being rich is different, every person’s financial responsibilities are also different. Thus, choosing the fund among the best mutual funds out there that work for you becomes more important.

How do we become Rich?

There are mutual funds like equity, debt., fund of funds, index etc., but to determine which mutual funds is best and will make you rich, you will need to keep the following points in mind:

Understanding your life Goals

Every individual has different life goals and aspirations. These can be short terms like planning for your marriage or a vacation, medium terms like planning for a car or long terms like planning for retirement or children education. Equity mutual terms are best when the time horizon is long, but debt mutual funds in the short term can give better returns. So identifying a time horizon brings down the universe of mutual funds by a considerable margin.

Risk Tolerance

How much sleep will you lose if your mutual funds start to give negative returns? You can be a conservative investor or a Risk seeking investor. Risk tolerance allows an individual to identify how much of a person’s current portfolio can be invested in risky assets like equity and how much can be invested in assured returns assets like debt. Risk and return have a proportional correlation where the higher the risk, the higher the return.

Minding Inflation

Inflation is a phenomenon that reduces the overall returns on your investments; whereas inflation rises, the cost of the commodities rises, the actual value of your returns decreases. Thus we must be careful that the return our mutual fund generates must be considerably greater than inflation to justify the risk taken.

Lower Expense Ratio

The expense ratio is the percentage of investment charged by the funds to manage a mutual fund. The expense ratio is charged every day irrespective of the mutual fund’s performance; thus, having a lower expense ratio leads to higher overall returns.

Systematic Investment

Systematic Investment or SIP is easy to build regular and continuous wealth. One of the most outstanding merits of Systematic Investments is the ability to have investment cost averaging. Stock markets have cyclic periods of rapid booms and busts. During periods of boom, you make a capital gain on your investment; in periods of bust, you can take advantage of the lesser NAV value of mutual funds units compared to when they were high. This dip allows for an investor to not time the market. A mutual fund calculator allows an investor how every small investment can create a considerable corpus after five, ten or twenty years for various levels of annual returns.

Tips till you become rich

Long term goals

Mutual funds invest in productive assets, which grow in value over time. Every mutual fund caters to different asset classes, which can depend on company size, sector or even geography. But one thing which stays common is to have a long term approach. For compounding to show its effects, it takes a minimum of seven to eight years, but the gain is incomprehensible once it starts. So sit back and relax!

Do not panic in a period of volatility

Every mutual fund you may choose to invest in will always have some inherent risk associated with them. There will be periods where your funds can give no or negative returns, but in periods like these, you as an investor must remain calm and look at the situations objectively. If there has been no fundamental change in your mutual fund AMC or the principle with which they had initially promised to invest, you should not be in a panic to sell.

Running after Returns

One major lesson that needs to be remembered is that an individual should not run behind the fund that generated the most return over the last year. While a mutual fund return calculator will show us a considerable corpus with this percentage of return, it is highly possible that it may or may not be repeated in the future. Thus we need to be careful in such a scenario and look for funds that have given lower but consistent year-on-year returns compared to the one-time high return.

Conclusion

Becoming Rich is easy but staying rich takes perseverance. A person can also become rich if they are an heir to properties and wealth earned by their family. Short-term wealth generation is sometimes possible by getting lucky on a stock trade or some mutual fund, but if not managed well, losing everything is also highly possible. Actual wealth generation takes time to build and envision yourself fifteen years in the future. Thus if you want to become rich with Mutual Funds, you will need patience and confidence in your investments.