Can Mutual Funds Generate Wealth by Compounding?
If you're a young professional looking to secure your financial future, understanding the importance of long-term investments in mutual funds is crucial. Many times you must have wondered if Mutual funds can generate wealth by compounding? This question specially becomes important when you see your friends make better short term returns in some stock they bought.
Let's explore why Equity based mutual funds should be your go-to choice as you start your investment journey.
Can Mutual Funds Generate Wealth - The Importance of Building a Strong Financial Base
Wealth creation is often understood as the process of multiplying funds. For instance, at a 12% post-tax return, money doubles in 6 years and quadruples in 12 years. If you have ₹1 crore at 40, you could potentially have ₹4 crore by 52, securing your retirement. But what if you don't have ₹1 crore at 40?
The Challenge of Lower Initial Savings
If your liquid net worth is ₹50 lakh at 40, you'd need 18% post-tax returns to reach ₹3 crore by 52—a tall order, but possible. The key is having a strong base amount. Without a substantial base at 40, salaried individuals may struggle with wealth creation. Business professionals, however, are often already on their journey to multiplying wealth.
The Risks and Realities for Salaried Individuals
At 40, many salaried individuals face risks due to technological shifts and a slowing economy. With higher expenses, such as children's education and aging parents or enhanced lifestyles, saving rates may drop to 10-20% of income, despite increased salaries. This highlights the importance of discipline and the ability to save effectively at a younger age.
Focus on Saving, Not Just Multiplying
For young professionals, the focus should be on saving—adding to your funds—rather than solely on multiplying them. Chasing higher returns on small amounts can lead to unnecessary risks. Instead, reducing expenses and focusing on building a solid base is crucial. It's about making smart choices, like giving up that iphone and opting for a more affordable phone, to manage risk and strengthen your financial foundation. Delaying gratification is a less understood virtue.
Note: This doesn't mean, you should stop living. Of course, living life to the full is as important. Do pay attention to saving too. Ignoring saving for future is a bad plan. If you have a high salary and you can afford to buy an iPhone or travel abroad while ensuring a decent 30% savings, why not? Explore cheap thrills like making the best from credit cards points also!!
Where Do Mutual Funds Fit In?
Since you have read so far, we have established the need to have a strong base for wealth creation journey to begin!! For creating a strong base, mutual funds are an ideal investment for young investors. When returns aren't as critical, mutual funds offer a safer and more reliable option than risky assets like Futures and Options (FnO). Doubling a small amount in FnO doesn’t compare to steady returns from mutual funds on a larger sum. If you're seeking the thrill of high-risk investments, this advice might not be for you. However, for most young investors, focusing on stable growth is key. So, next time your friend tells you he or she doubled their money in FnO, ask them the amount they doubled. Nobody bets their entire wealth in Casino unless you have a maverick friend!! At young age, you should be fully invested in equity based mutual funds with no urge for that 'Instant Gratification'.
Conclusion: Are You Ready to Build Your Strong Financial Base?
Mutual funds sahi hai for young investors looking to build a strong financial base. But are you ready to commit to the discipline and patience required to secure your financial future?
