Is It possible to become rich by investing in MFs?

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The simplistic answer to the above question is YES. The more realistic answer is that  most can at least attain financial freedom by investing in the right kind of mutual funds regularly.

Patience and discipline are the basic criteria that can help investors to create a great amount of wealth over a period of time. Investing through mutual funds is one good way to build wealth. One can get different options and can select the right combination based on an individual’s risk appetite.

Creating wealth is a long-term process where patience and discipline plays a pivotal role in the entire process.

By the wealth creation process, we mainly focus on Equity as an asset class rather than debt. Debt mutual funds mainly focus on income generation and capital protection avenues rather than wealth creation.

Equity as an asset class is quite a productive and performing asset over a longer time horizon. Not everyone can become a successful businessman to become wealthy, however, one can be a partner to a growing and well-managed business by becoming a shareholder of the company.

However, investing in equities is not an easy task and requires a lot of expertise and experience. Investing through mutual funds is a great way to build wealth as it is being managed by professionals having rich experience and knowledge in financial markets.  It is a long journey and investors need to be very selective and cautious in choosing the roadmap. To make this journey enjoyable with a manageable level of risk, there are certain aspects that investors need to keep in mind and shall be discussed in the following pointers.

  • Making a Robust Financial Plan and Goals: Investors need to have a clear financial plan (roadmap) that will guide them towards creating wealth in the long term. A robust financial plan needs to be made based on one’s income and expenditure – both current and future – that will help them to ascertain the amount one can invest periodically and systematically. Once these things are determined, a financial plan should be drawn around financial aspirations and risk appetite.
  • Starting Early is the key: One needs to start investing at an early age for the wealth creation process and to avoid any timing challenges. Starting early will enable investors to take advantage of “Compounding” which is referred to as the eighth wonder of the world. A simple example of such would be Warren Buffet, whose investments return around 22% annually, while Jim Simons (Medallion Fund) another legendary investor generated around 66% annually. However, Jim Simon’s net worth is almost one-third of that of Buffet’s. This vast difference is mainly due to the fact that Buffett (in the ’90s now) started investing at the age of 10, while Simons started investing at the age of 50 (in the 80’s now). An investor can start early with a mutual funds app that offers a seamless process, overview of growth and ROI.
  • Start Small If Need Be: Starting early with an investment is the ideal scenario. However, during those early ages an investor might not invest a considerable amount. Nevertheless, mutual fund SIP allows you to invest as low as Rs 100. Through mutual fund SIP an investor can benefit from compounding of investments. So start small with SIP if need be.
  • Always Have a Long-Term View and Keep Asset Allocation Right: Mutual funds’ investments should always be made with a long-term view in mind if an investor’s goal is to create wealth. It is very difficult to time the market and losing a few days of good movements in equity can make a lot of difference. Keeping a long-term horizon in mind with proper allocation depending on the investor’s risk appetite and re-balancing it at a certain frequency is the need of the day. By asset allocation, we mean large-cap funds, mid-cap funds, small-cap funds and flexi-cap funds.

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