How Mutual Funds Can Make You A Rich

How Mutual Funds Can Make You A Rich                                                                             Nowadays any average investor, wishes to have his part of mutual fund investments, even if he is not an avid stock market lover. 

It happens that even the conservative investor prefers his hard earned money to be managed professionally and which also lets the investor earn reasonably decent returns, which is why he may choose investing in mutual funds. 
Having said all of this, you may wonder if mutual funds can really help you reach your ultimate financial goals. So read on.

Don’t be a sheep in a herd

Sheep are known to follow their peers in the herd, without even looking out for any dangers or any other better way than the existing path. However, being so much ignorant towards the investment decisions will sure hurt you in the long run. It may happen that your family or friend may have purchased some fund at a certain point of time and has earned a very good dividend or very nice wealth appreciation. 

However, blindly mimicking such investing decisions may really hamper the portfolio. So be sure to study the mutual funds, their asset allocation, the businesses in which they invest, risk attached (standard deviation or beta), etc. before jumping into this pool.

Inflation Factor

While you are happy about the growing balance of fixed deposit at a bank, you must know for the fact that these returns are not tailor made for beating the inflation. Most of so called secure investment options like bank fixed deposits, do not factor inflation effect while giving out the returns. 

This is mostly because their return percentage is predetermined and won’t change according to the external developments like inflation etc. For e.g. if you invest Rs.10000 in bank FD at 8%, then you will expec t Rs.800 as interest income. Suppose with Rs.10800, you can pay up your rent of Rs.10800.

However, consider the real life scenario where you are experiencing 5% inflation effect. In such a case, you would rather don’t know that your interest is being eaten up by the inflation, so actual interest landing in your hands after an year would be Rs.800- Rs.40= Rs.760. Now you have fallen short of rent payment by Rs.40.

However, mutual fund returns are always accommodating for the inflation effect, which is why mutual fund investments are recommended. The reason being that the purchasing power of your future returns or corpus will not be diminished or hampered by the inflation effect.

Start small and earn huge

It’s true in the case of mutual funds particularly. If you think that you can’t afford to make huge investment at a time or hire a professional financial advisor for the sake of investment guidance, then mutual funds are surely the way to go for. 

Mutual funds can be bought on SIP (Systematic Investment Plan) basis which allows the investor to purchase small and periodic purchases of the mutual fund units. It is similar to recurring deposits, only difference being that these SIPs will build up wealth or render income that is inflation adjusted as opposed to the conventional recurring deposits (where you receive income at predetermined interest rates which are much lower as compared to returns on the mutual funds generally)

Midas touch by the professional fund managers

Professional management of the portfolio is the USP for the mutual funds for those who are skeptical about directly investing in the stock markets, but who still wish to reap their share of stock market gains. 

Fund managers are experienced and qualified to handle the investor’s money for a certain charge (which you can look up as included in expense ratio). Such investors won’t mind paying up the management fees to the fund managers for professional management of their funds invested in the mutual funds. 

Professional management of the mutual funds benefits the investors as below  

-      Qualification

The academic background of finance will add up to the knowledge of the fund manager. This will help him understand, analyse, and implement concepts and strategies with respect to mutual fund in the ever changing stock markets.

-      Experience

Fund manager is usually an experienced portfolio manager who has extensive knowledge and working experience with the mutual funds. Every fund manager has his own style and strategy which would ensure the achievement of the fund goals in the long run.

-      Research team and tools

The fund manager is usually accompanied by the fund’s research team and research tools for enhancing the returns pattern and maintain the corpus.

Diversification..!

Mutual funds pool the funds of the investors and invests them into various industries. Selection of the sectors or industries and companies depends on the fund strategy and asset allocation. Diversification ensures that magnitude of risk is brought down. For e.g. if you hold stock of company A, which has stock price ranging from Rs.10 – Rs.15, volatility can be measured as 50%. 

However, if you hold the units of mutual fund which invests in company A, but mutual fund will have diluted effect on the risk. Suppose mutual fund units NAV fluctuates between Rs.100-Rs.120, volatility being reduced to 20%.

Investment strategy ..!

If you want the balanced approach which will earn reasonable income/ wealth appreciation as well as enhance the corpus, then mutual funds are the way to go for you. 

You can allocate your earmarked funds (marked for saving and investment) to the balanced funds which will give out the reasonable returns however maintaining the risk magnitude to low-moderate. However, if you are left with surplus funds, you could invest them in high risk- high reward mutual funds. 

Especially if you are from high tax bracket, it is better to invest in equity linked mutual funds with high risks and retain them for at least 12 months. This lock in period will ensure that your higher returns are exempted, allowing you to save tax on capital gain as well as any wealth appreciation.

Mutual funds may be cliche, but they are the perfect partners in long run. Even if you don’t want to keep the funds for more than 3 to 5 years, efficient mutual funds are known to yield outstanding and consistent results within 3 to 5 years’ time period. 

Consult your financial advisors in mumbai for your richer innings along with mutual fund participation.

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