Before answering if mutual funds can make you rich, you first understand what is Mutual Funds. The Indian Market has 20 -24 equity products available for you to invest and make money in the long term and the short term. However, in the long term what truly matters is the rate at which your wealth grows every year.
There are various instruments for you to invest in the long run.
- Diret Equity
- Mutual funds
- Portfolio Management Services (PMS)
- Alternate Investment Funds (AIF)
- Real Estate Investment Trust (REIT)
- Crypto
- Real Estate
- Unlisted Shares
- Unit Linked Insurance Plans (ULIP)
- Life Insurance Company (LIC)
- And many more
But do we need so many products or ways to invest to get rich? The simple answer is no. Because for investing you need money. This cannot be that you want to invest in Real Estate and have 2000 in your pockets. When we try to figure out what instruments a middle-class investor like me can invest in, it narrows down to only one instrument and that is Mutual Funds.
What is Mutual Fund?
Mutual Fund is a bucket where many investors like you and me pour their money. The bucket is managed by a fund manager who has software, AI, a really smart ass team of analysts, and enough budget for expensive research. His sole responsibility is to make sure that this bucket full of money should grow and fill another empty bucket, which grows the entire bucket. Therefore, if the bucket grows, your money grows too.
Where does the fund manager invest?
Depending on the type of mutual fund, the fund manager invests in stocks in debt (government bonds, gold, etc.), or both. If you want to be rich, you have no choice but to invest in Equity Mutual Funds. In Equity Mutual Funds, the fund manager invests in stocks to grow your wealth. Is it risky? Yes, it is. But remember, the fund manager is not just any local train commuter who gives you tips on stocks. He is a highly educated person in the field of finance, has years of experience and expertise in the Indian stock market, has loads of information (more than you and your friend circle or the YouTube channel you follow) about the stocks in which we will be investing the fund’s money, a team of equally brilliant analysts who work is to monitor one – two stocks per person only, and the fund manager is paid a handsome salary (don’t ask or you will go crazy) for making the fund run successfully. Are these reasons good enough for you to invest in Equity Mutual funds rather than using your limited knowledge about stocks?
Why Mutual Funds? Why not direct equity?
Did you know that Yes Bank or Vodafone would stumble? The fund managers did long before you knew. These fund managers have in-depth knowledge about every stock that they invest in. A normal lay investor would never have such information in their pockets. It’s just not possible! Plus, investors like us have a 9-5 job and have hardly any time to research stocks other than just look at their performance daily. Let’s say you choose to have 20 stocks in your portfolio. There are two major disadvantages to this. Let’s say you want to but Reliance at 1200 levels. Can you who earn 20k-40k and month invest in 1000 stocks on Reliance? 1000 stocks of reliance would cost you 12,00,000. Happy investing! Because stock investing works on the principle of quantum investing. If you do not have good amount of shares, your portfolio will never grow.
The second major disadvantage of investing in direct equity is market timing. There is no need to explain this. By the time we investors get particular news about a stock, the bus leaves! We do not have the bandwidth to time the market. But fund managers do! They keep buying and selling the stocks in their funds without you even knowing. That is how they generate alpha over their benchmark.
How can mutual funds make you rich?
Since the opening of the market ( Nifty 50’s inception date was April 1996), the market has delivered 12% CAGR (Compounded Annual Growth Rate) which means if you had invested Rs 1,00,000 in May 1996, today that would have compounded to 23,88,386.65. Huge right! That is over just 28 years. Therefore, if you had invested in any Index Mutual Fund, you would have generated 23.88 lacs post 28 years. now, an actively managed mutual fund where the fund manager uses his expertise to generate alpha ( alpha refers to additional return over and above the benchmark). Normally they target a 2%-3% Alpha. So let’s take that you would have invested 1 lac in an actively managed equity mutual fund whose yearly CAGR is 14%, then your portfolio value for the same 28 years would be 39,20,449. A whooping 15.32 lacs of extra wealth generated!
