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Mutual Funds Speed Up Wealth Creation
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Disciplined investment over long term provides better returns than debt instruments
Every investor, whether conservative or aggressive, wants to see wealth to grow. A conservative investor would probably stick to bank fixed deposits, postal small savings, insurance policies, public provident fund (PPF), bonds etc. In contrast, an aggressive one would probably look at equity, real estate, etc. Although the investment style of each group is different, the objective is to accelerate wealth creation.
Investing through the mutual fund route over several years could accelerate the wealth creation objectives. And that too at a lower cost and with lower risks. This is because Sebi mandates that mutual fund schemes cannot charge more than about 2.75% of your assets each year, and in most cases the actual charge is lower than this figure. By paying this charge, you get access to professional fund managers with years of experience in investing. So your risk of losing money through investments is also lower compared to if you decide to invest directly in the market but do not have the requisite expertise. Also, the mutual fund industry in India is one of the most regulated sectors. This, in turn, leaves very low chance of you losing money through fraudulent or illegal means.
Financial planners and advisers say that the patience to remain invested over the long term can get you rich rewards. For example, an aggressive investor hoping to earn returns in the range of 15-20% per annum could look at investing through diversified equity , midcap or small-cap schemes, or a combination of the three. If you invest Rs 10,000 each month for 20 years and get an average return of 15% per annum, at the end of 20 years, the corpus will be nearly Rs 1.50 crore. Of this, your actual contribution is Rs 24 lakh. The balance Rs 1.26 crore is what your money has earned over these long period of investing. Here, one should note that the average long-term return on sensex is about 17% and a 15% return is in that sense a conservative one.
Consider a relatively riskier scheme that gives an average yearly return of 20%, that is three percentage points higher than the sensex return. In such a scenario, your monthly investment of Rs 10,000 would grow to about Rs 3.10 crore over the 20 year period --5% higher rate of return has more than doubled the total corpus size.
Consider a conservative investor who wants to play safe by investing in debt funds. Long-term income funds, a category of debt funds, over the last 10 years have given returns of around 8%. A similar return on Rs 10,000 monthly investment for 20 years would give you a corpus of nearly Rs 59 lakh -a growth of about 2.5 times your investment.
In the first two cases, your rate of return will almost surely beat the rate of inflation while in the third case too there is a chance that you can win the battle over price rise in the long run.
In the first case, at 15%, your Rs 24 lakh investment has grown more than six times, while in the second case the growth is nearly 13 times. The third case, in case of a conservative investor, the growth is about 2.5 times. This is the power of compounding that you can take advantage of over a long period of time by investing systematically and in a disciplined manner. This is also how you can accelerate your wealth creation through the mutual fund route.
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