Create Wealth Through Mutual Funds

Investing through mutual funds is a great way to build wealth. You get different options and can select the right combination based on your risk appetite to invest

If you scan the list of wealthy people globally and domestically, you will undoubtedly find most of them are owners of businesses that are being managed successfully. However, not everyone can become a successful businessman to become wealthy or create wealth. However, one can be a partner to a growing and successful business by becoming a shareholder of a company. For naive investors investing in the right kind of stocks is like a walk through a minefield – a wrong step or selection could erode your wealth instead of creating it. Hence, the best way is to get the help of professionals. 

For such investors, investing through mutual funds is a great way to build wealth. You get different options and can select the right combination based on your risk appetite to invest. Investors in India are adopting this route to create wealth. This is reflected in the rise of average assets under management (AAUM) of the Indian mutual fund industry. The assets under management (AUM) of the domestic mutual fund industry as on January 31, 2022 stood at Rs 38.01 lakh crore. In the last five years it has more than doubled – increasing from Rs 17.37 lakh crore as on January 31, 2017 to Rs 38.01 lakh crore as on January 31, 2022, showing a compounded annual growth rate of 17 per cent.

AUM Growth Of Indian MF Industry in Last Five Years

Such a rise in AUM has come along with the adoption of mutual funds by more and more investors. The mutual fund industry crossed a milestone of 10 crore folios during the month of May 2021. The total number of accounts (or folios as per mutual fund parlance) as on January 31, 2022 stood at 12.31 crore, while the number of folios under equity, hybrid and solution-oriented schemes, wherein the maximum investment is from the retail segment, stood at about 9.95 crore.

Using MF to Create Wealth

Creating wealth is a long-term process and hence you need to be patient and disciplined while investing. It is long journey and you need to be very selective and cautious in choosing the roadmap. To make this journey enjoyable, there are a few essential aspects that you need to keep in mind. 

Make a Robust Financial Plan Starting a journey without a roadmap may lead you to the wrong destination or keep wandering without getting you anywhere. Therefore, you need to have a financial plan (roadmap) that will guide you towards creating wealth. A robust financial plan needs to be made based on your earnings and expenditures – both current and future – that will help you to ascertain the amount you can invest. It should also take into account your goals – both short-term and long-term – in terms of necessity and wants so that you can prioritize your investment. Once these things are determined, your financial plan should be drawn around your financial aspirations and risk appetite. These things are important and will guide you throughout your journey of wealth creation. You should start with your investments only when you are ready with such a roadmap.

Start Early

If your destination (amount of wealth) is long, you need to start early to reach there. You need to start investing early as time is important while creating wealth rather than timing your investments. This is because of the eighth wonder of the world which is what Albert Einstein once said, “Compound interest is the eighth wonder of the world: he who understands it earns it, and he who doesn’t, pays it”. Let us understand this with the example of two of the most successful investors. First is Warren Buffet, whose investments return around 22 per cent annually.

Second is another legendary investor, Jim Simons, the military code breaker and mathematician who started Renaissance. His Medallion Fund generated return of around 66 per cent annually. Still the net worth of Simons is almost one-third of Buffet. The reason for such a vast difference in their fortunes is the time these extraordinary investors remain invested. Buffet who is into his 90s started investing when he was 10 years old while Simons who is now into his 80s started investing when he was 50. So, it is important to start early if you want to create sizable wealth.

Keep your Asset Allocation Right

Small investors need to keep their asset allocation right as studies and research have found that asset allocation is the biggest factor in determining your long-term investment. You should invest in different asset categories as not all assets perform in tandem and not all of them go down in unison. Therefore, as the adage goes, you should never keep all your eggs in one basket no matter how attractive the returns might seem. When you invest across asset classes such as equity, debt, commodities and real estate, your risk no longer remains concentrated as different asset classes bear different degrees of risk and do not always move in the same direction. The best example of this can be traced to the first quarter of 2020 when the equities tanked but commodity such as gold and long-term debt performed better.

Always Have a Long-Term View

There are investors who make investments based on the short-term movement of the markets. Nevertheless, if your intention is to create wealth in the long run, you should make your investment with a long term in mind. It is very difficult to time the market and losing few days of good movement in the market can make a lot of difference. Therefore, short term movement in asset returns should not sway you and you should always keep a long term perspective while investing.

The best thing for you to do is to have proper asset allocation depending on your risk appetite and keep re-balancing at equal frequency. For common investors who do not have much time to research, invest and track the performance frequently, mutual funds is one of the best options to create wealth for their own selves as well as for future generations. They offer different asset classes and within these asset classes there are sub-asset classes. Investors with any risk appetite can find a mix of investments that suits him or her.

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