Can Mutual Funds Help You Build Wealth?
Everyone has needs, aims, and aspirations. Turning these needs, aims, and aspirations into reality takes a lot of effort, time, and money. Whether it's buying a house, providing for your child’s education, catering to your family’s wants, or ensuring a comfortable retirement, having strong finances is of the utmost importance. To do all this, you need to convert your hard-earned money into sustainable wealth. But with hurdles like inflation, your savings can quickly get eaten away. To protect your hard-earned money from inflation, you need to invest.
Investing can offer you the ability to generate returns on your hard-earned money, helping you not only preserve its value but also giving you an opportunity to build wealth in the long term. When it comes to investing, a plethora of investment avenues are available, ranging from highly safe traditional investment avenues like fixed deposits to highly risky trading avenues like options. Choosing an investment avenue that strikes a balance between the two is important. A mutual fund is one such investment avenue that provides investors the opportunity to build sustainable wealth with peace of mind.
What Is A Mutual Fund?
A mutual fund is an investment avenue in which numerous investors pool their money. This pooled money is then invested by a professional fund manager into different instruments like stocks, bonds, government securities, etc., as per the fund’s investment objective. The performance of a mutual fund depends on the collective performance of the underlying assets. A plethora of mutual fund categories are available for investing in mutual funds. The major categories include funds based on management style (active/passive mutual funds), funds based on investment objective (equity, debt, or hybrid mutual funds), and funds based on investment structure (open-ended, close-ended, and interval mutual funds).
A subcategory that stands out when it comes to building sustainable wealth in the long term is equity mutual funds.
Equity Mutual Funds - A Wealth-Building Tool
For years, investors have had a lingering negative connotation associated with equity. While it is true that the stock market is volatile in the short term, in the long term, it provides an opportunity for growth. Moreover, the longer your holding period, the less likely you are to lose money. Let’s look at this with an example. The chart below depicts how increasing the holding period decreases the probability of losses.
(Source - BSE. Data for the period 3rd April 1979 to 31st August 2023. The probability of loss (%) represents the % of negative observations from the total daily rolling return observations for the respective holding periods. Past performance may or may not be sustained in the future.)
While the probability of loss decreases as the holding period increases, equity mutual funds also provide investors with an opportunity to build sizeable wealth in the long term. In the last 45 years, from 3rd April 1979 to 31st August 2024, the market has gone through many bull and bear cycles, including the dotcom bubble burst, the Harshad Mehta scam, the great financial crisis, global weakness, and the COVID-19 crisis. Moreover, the country has gone through economic, political, and monetary policy changes. However, despite all this, those who stayed invested during this period could’ve grown their wealth by more than 650 times!
(Source - BSE. Data for the period 3rd April 1979 to 31st August 2024. Sensex growth is represented by the returns of Sensex Price Index (PRI). Sensex growth is represented by the returns of Sensex Price Index (PRI). The drawdown of market crashes is calculated from 52 week high to the date of the bottom of the respective market crashes. Past performance may or may not be sustained in the future.)
Hence, the truth about equity mutual funds is that they can not only decrease the chances of losses if the holding period is long, but they can also help you build sustainable wealth in the long term. Now, let’s look at some other benefits of mutual funds.
6 Benefits Of Mutual Funds
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Diversification
A mutual fund invests in a basket of assets like stocks, debt, government security, etc. This distributes the risk into different asset classes. Hence, if one asset class is unable to perform, it can be covered by the other underlying asset classes. Moreover, with mutual funds, you can gain exposure to different asset classes without concentrating large sums of investment on a single asset.
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Professional management
The decision of selecting underlying asset classes to invest in lies with the professional fund manager of the asset management company. Fund managers are experienced professionals who conduct in-depth research and analysis to make investment decisions. Moreover, you can rely on the fund manager’s expertise without needing to spend time and effort on market research.
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Accessibility & Affordability
Mutual funds allow investors to invest small amounts of money at regular intervals, making it highly affordable and accessible. Moreover, with the low barriers to entry, anyone and everyone can invest in mutual funds. Some AMCs even allow investors to start a monthly SIP with just Rs 100.
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Liquidity & Flexibility
Most mutual funds allow investors to redeem their money as and when they need it. Investors also have the flexibility to choose the investment horizon that best suits their financial needs.
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Transparency
Mutual funds are regulated by the Securities and Exchange Board of India (SEBI) and, hence, are subject to strict regulatory requirements, ensuring investor protection. Mutual funds are also required to provide regular updates on the portfolio holdings and performance, further enhancing transparency.
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Tax Benefits
Some mutual funds, such as equity-linked savings schemes (ELSS) offer tax benefits to investors under section 80c of the Income Tax Act. ELSS offers twin benefits of tax saving and wealth building.
To conclude, investing in mutual funds provides investors with a leeway to beat inflation if the investment horizon is long-term. Moreover, with a longer holding period, investors have the opportunity to build wealth with reasonable peace of mind. However, due to the plethora of mutual funds available lying in different categories, it might be a tedious and time-consuming task for you as an investor to choose the right mutual fund for yourself.
In such a scenario, you can opt for the guidance of a mutual fund distributor. A mutual fund distributor’s primary task is to understand your financial needs, financial position, and risk profile and match that with the right mutual fund for you. With the help of a mutual fund distributor, you can not only be successful in fulfilling your financial needs, but you also get the opportunity to build wealth.