How to become a millionaire by investing in mutual funds?

Updated: 02 Oct 2022, 03:00 PM IST

Investments can be a slippery slope, regardless of the rich view it offers on the other side, quite literally. There is a reason why expert wealth managers are hell-bent on diversifying your assets portfolio. Below are a few things which investors need to consider before investing in mutual funds.

Buying or selling mutual funds are not complex. If you had bought the mutual funds through Demat account, then you will have to sell through the same account.

Becoming a millionaire or a crorepati in Indian terms is what drives investors towards various investment options. There are hundreds of investment opportunities available, but the one that has emerged as the best strategy for becoming a millionaire is Mutual Funds.

Becoming a millionaire with any product is no easy task; you need to take into account all the factors for selecting the right product which will determine your returns in the long term. Investors need to make the right financial moves which will give them consistent returns over the long term, which is necessary to become a millionaire.

Since its inception, mutual funds have generated returns of 19.25% on average annually, and every three years the invested capital has doubled. Considering that the fund has produced an average annual return of 19.25% since its inception, a monthly SIP of 10,000 initiated 20 years ago would today be equal to almost 1.82 Cr.

Even for a shorter horizon mutual funds over the last 10 years have delivered over 14% returns on an average. Systematic Investment Plans (SIPs) have been one of the most preferred methods for investing in mutual funds. So, if you plan now and start a monthly SIP of Rs. 40,000 for 10 years @ 14% returns, you will have 1.03 Crores at the end of the tenure.

However, it seems simpler when we only look at the numbers; investors need to consider their financial position and risk-taking capacity to ensure continuity of investments and the suitable strategy. Investments can be a slippery slope, regardless of the rich view it offers on the other side, quite literally.

There is a reason why expert wealth managers are hell-bent on diversifying your assets portfolio. Below are a few things which investors need to consider before investing in mutual funds.

Risk profile

A risk profile will give you a better perspective on how to invest your money wisely into mutual funds. We cannot predict when the markets will go up and when they will go down, hence, risk profiling will help take strategic and calculated risks when it comes to investing in mutual funds. You need to identify the optimal level of risk that is right for you. You need to look some factors such as –

  • Your risk tolerance, which is your willingness to take risks and indicates your emotional tolerance towards the ups and downs in the market and towards risk-taking in general.
  • Your risk-taking capacity, which is your ability to take risks depending on the factors that can be quantified (your income, number of dependents, liabilities etc.)

Selection of mutual fund schemes

Picking the right set of mutual funds requires a good understanding of schemes. For example – there are thousands of schemes available in the market. If we look at the category average of the mutual funds, they may or may not beat the index because eventually, it becomes the average of all the schemes present in a particular category, and not every scheme will beat the index.

Thus, picking the right ones is important. Some points which can be considered.

  • Fund manager – You can look at the credentials of the fund manager, his track record, time since he has been managing the fund etc
  • Scheme performance – You can check the track record of the scheme, performance over 3 years, 5 years and 7 years. This will highlight the consistency of the scheme. Performance can also be compared with the category average to check if the scheme is outperforming in its respective category.
  • AMC track record – You should check the other schemes of the AMC as well to see if all are performing consistently or this particular scheme is an outlier.

Reviewing & Rebalancing

One common mistake while investing is, investors select schemes and forget to review the product regularly. There are several factors which affect the schemes like change in fund management, underperformance, or inconsistent performance. It is necessary to keep monitoring the schemes and make changes when required to achieve the financial goals.

Rebalancing is a part of reviewing, portfolio is constructed based on your risk profile and objectives, with time your risk profile changes, and market conditions also change, schemes picked in the portfolio need to be re-evaluated and allocation needs to be rebalanced to align with your risk profile, objectives, and market conditions at all times.

Option selection

There are a variety of factors which are necessary for achieving the financial goal, investors need to allocate time and resources to evaluate these factors, which in most cases investors are unable to do, which makes this goal difficult to achieve. This is why mutual funds have the option of regular plans where an expert manages your portfolio and helps you achieve your financial goals.

But in case the investor is confident of managing the portfolio themselves then mutual funds have the option of direct plans where the expense ratios are 0.50%-0.75% lower than regular plans.

Mutual funds are not just a binary investment, where you either chip in or you don't; they have their own spectrum of options and preferences that suit an investor's comfort. Investing in mutual funds consistently with research can make you a Millionaire in just 10 Years, depending on the SIP amount you allocate.

Vivek Goel, Co-founder and Joint Managing Director, Tailwind Financial Services, a new edge wealth management platform.

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First Published: 02 Oct 2022, 03:00 PM IST