How do you grow rich with Mutual Funds?
Wealth accumulation is one of the top priorities for many investors. Do you aspire to maximise your wealth without actively managing your investments and constantly monitoring your portfolio? If yes, 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 exactly to go about it, or how mutual funds help grow your wealth? Here are a few simple steps.
5 principles to grow your wealth with mutual funds
- Start early
- Invest regularly
- Invest for the long-term
- Take the SIP (Systematic Investment Plan) route
- Don’t discontinue your SIPs abruptly
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. 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 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. 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:
- There’s a material change in the scheme’s objective
- There’s a fundamental change in the fund manager’s approach
- A mutual fund scheme you have invested in underperforms for a considerable time period
- You have met your goal
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!
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