A lot of people are unhappy with their current financial status and are constantly in pursuit of investment schemes that may hold the potential to make them rich over the long term. The key to financial planning and wealth creation is patience. One cannot expect to become wealthy overnight. Investors must understand that wealth creation is a gradual process, and it needs commitment and discipline.
One way to create wealth over the long haul can be with mutual funds. Mutual funds are a pool of professionally managed funds that invest across asset classes and money market instruments. Some of the asset classes in which mutual funds invest are equity, debt, and gold. They also invest in money market instruments like government bonds, corporate securities, CBLO, reverse repo, cash, and cash equivalents, etc.
There are several reasons that make mutual funds an ideal wealth creation tool. Let us take a look at some of them –
Diversification – One of the primary reasons why investors consider mutual funds over direct stock investments is diversification. Mutual funds invest in a diversified pool of securities like stocks, bonds, currency, etc. They offer diversification like no other investment scheme. A single unit of a mutual fund scheme is a composition of different stocks. If an individual had to invest in these stocks directly, he might have to shell out thousands of rupees to buy a single stock. However, through mutual funds, they can own several such stocks in small percentages.
Active portfolio management – Another reason why investors do not have to worry about mutual funds is that they are managed by a team of professional fund managers. Fund managers or portfolio managers as they are called, are the decision makers who decide which securities to invest, which ones to hold onto, and which ones to sell and book profits. They are responsible for ensuring that the investment objective of the scheme is accomplished and that the fund is able to beat the competition by outperforming its benchmark. They try to minimize investment risk and maximize returns through their expert fund management skills.
SIP investment option – If you ask any financial advisor, they will advise that if you want to create wealth with mutual funds, you need to have patience and persistence. One way to ensure that you are disciplined and committed till your investment objective is accomplished is by opting for the SIP route. Also referred to as Systematic Investment Plan, SIP is the easiest way to create a commendable corpus by periodically investing small, fixed sums in mutual funds. Invest can decide an amount that they are comfortable investing, and start the SIP in any mutual fund scheme of their choice. They can even take the help of the online SIP calculator to determine the total wealth created at the end of their investment journey.
Power of compounding – The key to wealth creation with mutual funds is making the most out of the power of compounding. In mutual fund terms, the power of compounding is the process where your initial investment generates profits, and gradually over time, these profits start generating interest of their own. To witness the power of compounding effect investors, need to choose the growth option over the dividend option. Because in the dividend option, returns generated by the scheme are being rolled out to investors. But in the growth scheme option, these returns are reinvested back in the fund and can create a compounding effect, thus helping you build a decent corpus.
Mutual funds have outperformed all other conservative investment avenues in the past and are a favorite tool of investors. However, one should only invest as per their risk tolerance to avoid losses.