How many times do we find people questioning the validity of investing in mutual funds? The most common question asked is “Is it possible to get rich using mutual funds?”. The inference to mutual fund investments is mostly from investors with limited knowledge of personal finance or complete dependence on traditional insurance plans to save and park their money for growth. Knowing nothing about mutual funds has caused many to harbour misconceptions surrounding them.
This article will try to understand “Why Mutual Funds Sahi Hai?”. Of course, there must be some level of risk tolerance but no investment is completely bereft of inherent market risks. It is impossible for India at 75 to continue saving enough with traditional market investments. The focus is not to beat inflation alone but also to create wealth that will sustain their lifestyle post-retirement without enough income.
Do mutual funds create wealth?
This is a question that most mutual fund investors will answer in the affirmative, the reason being fund houses’ ability to diversify risk by parking money in various stocks and sectors. The choice of mutual funds, however, depends on risk appetite. Take, for example, moderate investors who prefer flexi-cap mutual funds that invest across both large and market capitalizations depending on market conditions and fund houses’ outlook. Most flexi-cap funds offer not less than 12 per cent returns. Though volatility is innate to all mutual funds owing to their investments in stocks, flexi-cap are said to be less risky than small-cap funds.
The same is with large-cap and small-cap funds too. Large-cap mutual funds typically park money in blue chip companies as opposed to small-cap companies that earn from investments in companies with much small capitalization. The risk factor is higher in small-cap companies owing to their increased vulnerability to macro factors and sudden changes in government policies.
Time is money
Time is the biggest determining factor in mutual fund investments. You cannot explain the power of compounding without giving your investments to grow and multiply. Talk about equity mutual funds, and you will find a lot many financial professionals favouring long-term investment strategies owing to the power of compounding to create significant wealth over time.
The best investment options that serve investors’ interests are those that park money in portfolios with at least 65 per cent allocation to equities. Lump sum investment may not be possible for all, so small investments through systematic investment plans (SIPs) are the best way to put in money to create wealth over a period.
Once you are aware of your financial goals, financing your long-term objectives should be your next goal. However, considering that you may have both short-term and long-term financial goals, you may have to allocate some of your earnings to hybrid and debt funds.
For example, the Quant Active Fund Direct-Growth helped people double their money in just five years, and that too when investments were done purely through the SIP mode. Benchmarked against the Nifty 500 Multicap 50:25:25 TRI Index, has earned around 21 per cent returns since inception.
Investors have earned 23.30 per cent five-year returns, thus, underlining the importance of parking your money in a well-performing fund for at least five years. Prolonged investment for around a decade or more would yield more, thus, helping many to create an enviable corpus that would sustain their lifestyle post-retirement.
Investing in equity funds
The following table suggests returns from various equity mutual funds corresponding to monthly SIPs of ₹10,000 for five years.
| Name of the fund | Market cap | Monthly SIP (in Rs) | Five-year returns (in %) | Wealth accumulation after five years (in Rs) |
| Canara Robeco Bluechip Equity Fund | Large Cap | 10,000 | 15.28 | 9,03,918 |
| Axis Bluechip Fund | Large Cap | 10,000 | 14.52 | 8,84,802 |
| Quant Mid Cap Fund | Mid Cap | 10,000 | 22.26 | 11,05,084 |
| PGIM India Midcap Opportunities Fund | Mid Cap | 10,000 | 21.67 | 10,86,128 |
| Axis Small Cap Fund | Small Cap | 10,000 | 21.69 | 10,86,764 |
| Kotak Small Cap Fund | Small Cap | 10,000 | 19.96 | 10,33,343 |
Investing in hybrid funds
The following table suggests returns from both aggressive and conservative hybrid mutual funds corresponding to monthly SIPs of ₹10,000 for five years.
| Name of the fund | Market cap | Monthly SIP (in Rs) | Five-year returns (in %) | Wealth accumulation after five years (in Rs) |
| Quant Absolute Fund | Aggressive Hybrid Fund | 10,000 | 20.39 | 10,46,322 |
| ICICI Prudential Equity & Debt Fund | Aggressive Hybrid Fund | 10,000 | 15.13 | 9,00,105 |
| Kotak Debt Hybrid Fund | Conservative Hybrid Fund | 10,000 | 9.89 | 7,78,487 |
| Canara Robeco Conservative Hybrid Fund | Conservative Hybrid Fund | 10,000 | 9.02 | 7.60.310 |
Investing in debt funds
The following table suggests returns from debt funds corresponding to monthly SIPs of ₹10,000 for five years.
| Name of the fund | Market cap | Monthly SIP (in Rs) | Five-year returns (in %) | Wealth accumulation after five years (in Rs) |
| ICICI Prudential Long-Term Bond Fund | Long Duration Fund | 10,000 | 16.36 | 9,31,955 |
| Axis Strategic Bond Fund | Medium Duration Fund | 10,000 | 20.09 | 10,37,246 |
| Aditya Birla Sun Life Short Term Fund | Short Duration Fund | 10,000 | 20.00 | 10,34,542 |
The number of people investing in mutual funds has gone up considerably over the past decade. While there may be many reasons to park money in these funds, one of the major factors that personal finance experts attribute to this changed investing behaviour is “Inflation”. The realization that the value of money is gradually decreasing with time and that bank savings and deposits will not be enough to sustain future expenses has given way to more people relying on the market to earn high returns.
