In case you are a first-time reader, mutual funds is simply managing of investors money through investing it in stock market, debt market or other money market instruments. So, coming back to the main question has investing in mutual fund made anybody rich? There are two types of people who may be negative in their answers: (1) those coming from an organisation who wants to sell their investment ideas instead of mutual funds, (example, real estate, insurance companies, etc) and (2) those who simply have an agenda against mutual fund.
From a neutral perspective you may simply chose to ignore the first category and as you finish this article you may have as well made up your mind.
If you want to create wealth, investment is inevitable as you cannot simply keep your money lying in the bank accounts. Choosing some form of investment is mandatory if you want to achieve financial independence.
Let us say we compare two popular investments – Fixed Deposit and Mutual Funds taking a 12-year horizon. Mr A chose to invest in FD, while Mr B chose mutual funds. In 12 years, Mr A received an average return of 7% on his FD, while Mr. B got 12% return in the same tenure. Do we have a clear winner in mutual funds? No! Why? Check the table.
Fixed deposit wins, doesn’t it? The answer to this is again no, because we forgot to analyze the amount of money invested by both the investors. There is no debate of FD vs mutual fund, the answer to who is the best lies with us, because the more we invest, higher are the chances of creating greater wealth.
Choosing the investment instrument is important but it secondary to the amount we choose to invest in it every year. We always prefer those investment instrument which have or are capable of beating inflation, and yes, they may in their prowess might beat inflation easily, however while comparing it with your savings and investment pattern, you might fail even if we have chosen the right instrument.
Therefore, just like savings and investment are important, increasing our investment quantum each year is crucial. While we are increasing our investment, keeping expenses controlled are necessary as well. Every instrument has its advantages and dis-advantages, the answer of choosing in between them lies within our own financial objective. These objectives let us understand what exactly is needed and at what time, which also answers how much risk we can take. Thus, instead of chasing the returns we must concentrate on what is the objective and how to achieve it.
Rate of return of each instrument varies over a period of time, including fixed deposits. For example as per bank repo rate, the FD rate keep on changing owing to economic scenarios. Needless to say the same about mutual fund, as depending upon the type of mutual fund, they are among the most volatile in all instruments. So, going by above facts rate of return is beyond our control, however rate of investment is very much in our control. Therefore, no matter what return we receive at the end of our financial journey, if we manage to increase our investing amount, it is safe to say we shall be in a better position to achieve our objective than the rest.
So will mutual funds make you rich? The answer is yes provided we follow:
a. Save more, invest more and spend responsibly
b. Choose instrument according to our objective, risk taking capacity and in alignment to above point. Therefore, if you choose real estate, point a may not be a feasible option unless you choose to invest in REITs
c. Stick to one point or least strive to achieve it, because in the longer run, we are more secured without worrying too much about inflation, rate of return or instruments
d. Don’t fall in the comfort zone of past performances, as future conditions are not in our hands, so let’s control what is in our hand and increase our investments periodically
Becoming rich is easier than becoming wealthy, one trade in stock market and we find ourselves with loads of cash. However, becoming wealthier requires time and perseverance, therefore instead of looking at returns, try raising investment quantum. There is no magic solution to become wealthier. Therefore, put in hard work and let the instruments take care of our in future.
(Viral Bhatt is the Founder of Money Mantra, a personal finance solutions firm)
