Wealth accumulation is perhaps the top priority for most investors, and if you aspire to maximise your portfolio without needing to actively manage it, then you may have already been informed of mutual funds as a pivotal option for your wealth creation journey.
However, if you’re still wondering how to invest in mutual funds, or how mutual funds help grow your wealth? Here’s a simplified explainer
What are Mutual Funds?
Mutual Funds are common investment instruments where many individuals pool their wealth, this wealth is then invested on a periodic basis across the securities market. Depending upon the type of Mutual Fund & its goal, these investments may be made in Equity instruments, Debt, Commodities such as Gold or any other asset class. Every Mutual Fund has a fund manager who oversees the regular & proper allocation of the fund’s wealth.
Advantages of Mutual Funds
Mutual funds offer individuals:
Steps on how to invest in Mutual Funds
Start early: Don’t underestimate the power of compounding. An investment of ₹ 1 Lac in a mutual fund scheme for 10 years, assuming the CAGR (Compounded Annual Growth Rate) of 12% would fetch you ₹ 3.1 Lac in 10 years. However, in 20 years, the same investment can grow to ₹ 9.6 Lac. This is the power of compounding and it is one of the key advantages of Mutual Funds. The longer you stay invested, the larger your accumulated wealth.
Invest Regularly: It’s not just important to start early but equally crucial to invest regularly. A monthly investment of ₹ 10,000 per month for 10 years can help you build a corpus of ₹ 23 Lac in 10 years and ₹ 98 Lac over 20 years, (assuming a CAGR of 12%). You can also think of increasing your contributions as and when your income grows.
Invest for the long term: While it might be thrilling to trade frequently and churn your portfolio depending on market conditions, too many changes at frequent intervals can do more harm than good for mutual fund growth. The tussle between bulls and bears can go on until eternity but selling your investments when markets are under pressure can be counterproductive to your long-term wealth creation.
Consider the following examples. Parag Parikh Flexi Cap Fund and Quant Flexi Cap Fund have been some of the top performing schemes in the category. However, if you had offloaded them during the turbulent market phases (highlighted in grey) hoping to add them back when markets recovered, you could have lost crucial buying opportunities.
Take the SIP route: Instead of investing in mutual funds in an ad-hoc manner or investing only when there you have surplus funds, it is better to take the SIP route. This will also help bring discipline to your financial habits.
Now consider the following illustration. An SIP of ₹ 10,000 in Parag Parikh Flexi Cap Fund and Quant Flexi Cap Fund could have fetched an XIRR (Extended Internal Rate of Return) of 17% and 19% respectively between April 2014 and April 2023. Nifty 500 has generated a return of approximately 12% over the same time period. XIRR takes into account the payoff of each SIP installment and denotes the smoothened out returns.
Don’t discontinue your SIPs abruptly: Many investors are tempted to discontinue their SIPs if the mutual fund schemes they have invested in underperform even for a short term. Always remember what Benjamin Graham famously said, ”in the short run, the market is a voting machine but in the long run, it is a weighing machine.” Once you diligently select mutual fund schemes, your job is half-done. Process-driven fund houses blend their investment tenets with their market expertise to help you grow your wealth.
For example, Parag Parikh Flexi Cap Fund has always followed the principles of value investing, has never hesitated to take measured cash calls during challenging market conditions and even invest in overseas markets to offer its investors adequate diversification.
When your fund manager takes such prudent measures, you need not churn your portfolio actively.
Ideally, you should replace a mutual fund scheme with a suitable alternative only when:
In-short
Mutual fund investments can help you create wealth provided you choose them carefully and remain invested for the long term. Consider the SIP route and start out early to make maximum use of the power of compounding!
Disclaimer:
The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a fundamental reason to buy/hold/sell any stock. Furthermore, the information provided in the blog and observations made there shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities. If you follow any research recommendations made by our fundamental or technical experts, you should also read associated risk factors and disclaimers.
We strongly suggest you consult your financial advisor before taking any decision pertaining to your finances.
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to the blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in the securities of the company. We do not have any directorships or other material relationships with the company.
We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.
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