15 Mutual Fund Wealth-Creators

15 Mutual Fund Wealth-Creators

Contrary to what fables may state, it never rains money through the roof. To create wealth, you must have a proper plan in place – one that takes into account your investment objectives while also helping you to generate wealth. Mutual funds, as this report shows, is the best option


Does the accumulation of wealth have an upper limit? Can we truly say that we have enough and there is no need for anymore? And why is that so? For the simple reason that it is money that helps us buy all the things that are available on earth, whether it is a modest apartment, a fancy car, the best of watches, vacations to exotic locations, dining in the finest of restaurants or even such basic needs as the education and marriage of children. Creating wealth is art. And it can be done with proper planning. And one of the best options available to plan better is mutual funds. 

In fact, an increasing number of investors are realising this as is reflected in the mutual fund inflows’ numbers. The year 2020 was the seventh consecutive year when the equity asset under management (AUM) posted an increase with the equity AUM at Rs 9.5 lakh crore – more than double the amount at the start of 2016.

In the last five years, equity-dedicated mutual funds have cumulatively created wealth of Rs 1.28 lakh crore for MF investors. Out of these five years, MFs have been able to create wealth for three years while the remaining two years were rather lacklustre. To arrive at the quantum of wealth created by MFs we have subtracted the rise in AUM in a year by net inflows into equity-dedicated funds.

Interestingly, wealth creation would have been much better if investors had kept their faith in the market in 2020. Out of the 12 months of CY20, there was negative inflow in the last six months of the year. Investors redeemed almost Rs 2,264 crore from their equity MF investments even though the net inflows remained at Rs 6,400 crore for CY20.

There are reasons why we believe that for not so active investors, mutual fund remains one of the best tools to create wealth and achieve financial goals. There are certain basic fundamentals you must keep in mind when you start investing in mutual funds, as outlined below. 

Start Early

The road to wealth through mutual fund investment is long and arduous. However, if you start early and keep investing, it will help you to create wealth. The essence is to invest early and remain invested for long so that your money gets the maximum time to grow to the required levels and at the required time. Therefore, to reiterate, start early. The power of compounding gives you an edge—the more time your money gets to grow, the more you gain. For instance, Shyam Shukla started investing Rs 2,500 per month at the age of 25 years while his friend, Pankaj Pandey, started investing twice as much his friend but started doing so at the age of 35. When both turned 45, Shukla had amassed a corpus of Rs 22.78 lakh while Pandey had only half as much as his friend, assuming their investment grew at 12 per cent return. 

Invest Consistently

Domestic equity-dedicated mutual funds have been witnessing continuous net outflow for the last seven months in a row. This shows that many investors are trying to time the market and cashing out with a rising market. Think of an investor who redeemed his mutual fund investment in July 2020; he easily lost the opportunity to gain more than 30 per cent. Hence, investing in MF requires a lot of discipline. Avoid trying to time the market. That’s a difficult thing to do on a consistent basis.

Diversification and Asset Allocation

Protecting your wealth is part of the process of building wealth. One of the best ways to protect your wealth is through diversification. You should invest in different asset classes and sub-asset classes to get the benefit of diversification. A mutual fund aids you with diversification at a much lower cost. However, there should be rationality to it as overdiversification may be counter-productive. Using different types of mutual funds allows you to modify the risk of your investments to match your personal risk tolerance. When you are under the age of 50, you still have enough years to make up for any losses you may have suffered from risky investments. 

Therefore, allocating more of your investment money to aggressive growth funds might create greater profits. As you approach your retirement, however, allocating the majority of your assets to conservative debt funds protects you from large losses if the market unexpectedly drops. Wealth creation through a mutual fund is a journey and not a destination. You need to be always attentive in your journey by way of a periodic review of your investments. This will help you to remain on track to creating sustainable wealth. 

In the following pages we are listing 15 mutual fund schemes, divided into five each from large-cap, mid-cap and small-cap categories. These schemes have generated best annualised return in last five-year ending December 2020, in their respective categories. These are not our recommendation list. 

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