Last Updated on September 9, 2022 at 8:48 am
“Has anyone ever gotten rich using mutual funds?”. You may have seen this question do the rounds on social media and personal financial forums from time to time. This is asked by two sets of people.
(1) Those who wish to push other products: Insurance, stock advisory services or a PMS and (2) young investors unsure about the capital markets. The former group has an agenda and can safely be ignored. We will focus on the latter group here.
To offer a superficial answer, I know plenty* of people who have gotten rich using mutual funds. I am one of them: Fourteen Years of Mutual Fund Investing: My Journey and lessons learned. *I stopped to count: the number of readers who have changed their social station predominantly due to mutual funds over the years is at least 17, excluding me. If a loner like me can count 17, I am sure there are thousands more.
That is not the point, though. We have been brainwashed by the financial services industry with tales of compounding and huge returns. We believe we can change our lives if there is a guaranteed way of getting such huge returns. That is why we are looking for “solved example problems.”
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In my talks, I often ask the audience this question. Two co-workers started investing the same day. One chose only fixed deposits and the other only mutual funds. The FD guy got 7% returns after 25 years, while the MF guy got 13% returns. Who made more money?
Most people in the audience assume it is the MF guy until someone realises that the amount invested by the co-workers is not known. A 7% portfolio can result in greater wealth than a 12% portfolio if the amount invested in MFs is less.
The point is that returns are important but not as important as the amount we keep investing and the time we allow it to grow. We need money to make money.
The instrument is only secondary. Anyone who systematically invests and anyone who systematically increases their investment each year will end up with a sizeable chunk of wealth no matter where they put it – MFs, FDs etc.
We cannot buy anything with “huge returns”. We cannot beat inflation with “huge returns” – unless we invest enough. See: Equity may beat inflation, but that doesn’t mean you will! And, Why you need time, money and returns to beat inflation.
So anyone looking to create “wealth” should aim for two things: (1) Time – start immediately (don’t waste time thinking about lost time!) and (2) Increase your income but do not proportionately increase your expenses! Invest as much as possible and increase this investment each year as much as possible.
Yes, you need a good chunk of equity for long term goals. This equity can be in any place you are comfortable with: stocks, MFs, ETFs, stock baskets, PMS, whatever. The point is that it is not the instrument that will make you rich. Only your understanding of it and how much you invest in it consistently will.
Take my equity mutual fund portfolio for retirement, for instance. For the first five years from June 2008, returns were zero. Then it shot up. In March 2020, it fell to 2.75% – My retirement equity MF portfolio return is 2.75% after 12 years! Not much happened to my financial independence status, though.
If this happens after 12 years, it can happen at any time. So one of my biggest lessons is: Do not expect returns from mutual fund SIPs! (Do this instead!)
The rate at which our investments grow keeps changing. We have no control over it. We have better control over the rate at which our investing grows. The primary reason I was able to achieve financial independence is that I was able to increase my investments much more than the return I got from them. I was lucky that my investing rate was also significantly more stable than portfolio returns. See: Why increasing investments each year is crucial for financial freedom.
Therefore I urge young earners not to search for that magic instrument or magic return that will change their life. Have a long-term vision of your lives: In 20-30 years, I will be a multi-crorepati. I will not waste my time chasing shortcuts. I will increase my income and invest as much as possible without expecting immediate results. Choose a balanced portfolio of 50-60% equity (ideally index funds) and 50-40% fixed income (EPF/PPF/NPS/Debt funds etc.).
In this portfolio, they should start investing as much as possible immediately and increase investments each year as much as possible. They should invest without worrying about market conditions. Once this is set in motion, they should learn portfolio risk management (rebalancing, de-risking) as per their need and implement it as required. That is it. If this is done for a decade, we will see the change. If this is done for two decades, we can cement the change.
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