The end game of investing is that we are all trying to get rich. And this obsession of getting rich is not just limited to the poor or middle-class investor. Billionaires like Elon Musk, Jeff Bezos, Warren Buffett and countless others are always searching for the best ways to get wealthier. So, you are not the only person looking for ways to get rich and get rich quickly. Afterall, who has the time to put decades worth of effort to get rich like Warren Buffett.
But then there is a fundamental difference between the rich trying to get richer and the middle-class investor trying to get rich. You see, the rich have all the resources in the world and the top MBA executives on their payroll to help them make smart investment decisions. Who do retail investors have? Absolutely no one.
A retail investor is heavily dependent on so-called market experts who change their recommendations quicker than the changing Mumbai weather. One day a stock is the next Multibagger and the very next day, it is doomed to fail. Even the brightest minds in the world are yet to reach a consensus on whether cryptocurrency is an investment option or an investment fad. And the sacrificial lamb in this entire charade is the retail investor. They try to emulate what rich investors like Rakesh Jhunjhunwala or Mohnish Pabrai are doing, but still fail because they end up buying a stock only to realise that by the time they enter into the respective stock, these millionaire investors have already sold their stake and moved onto the next bet. So, a retail investor is always behind the eight ball.
But then does it mean that you, the investor, should cease the pursuit of wealth? The answer is No. You do not have to stop your pursuit of wealth, but you do need to change your psychology while creating wealth. Retail investors have to realise that they do not have the necessary resources to make smart investment decisions. They need to realise that they have to outsource these decisions to a fund manager, much like the millionaires do.
This is where mutual funds come into the picture. Being professionally managed, mutual funds are indeed the best way for retail investors to create wealth, fulfil financial goals, and have financial freedom.
But how exactly do mutual funds make you rich? And which are the best mutual funds that can make you rich? These are some of the questions that we will answer in this article. But first, let us understand what are mutual funds.
What are mutual funds?
A mutual fund is a professionally managed investment vehicle that pools funds from various investors and this collected corpus is then invested in different asset classes as per the investment objective of the fund. The investors of a mutual fund are known as unitholders who are allotted units at a price, called the Net Asset Value (NAV) of the fund. Are you new to mutual funds? Well, here's a guide to the basics of mutual funds to get you started.
There is no doubt that there are plenty of investment options in India that have the potential to make you rich. But then, why are we so bullish on mutual funds? Let us present our case as we look at the biggest advantages of mutual funds.
Why we believe mutual funds will make you rich...
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Mutual funds are managed by professional fund managers who have the required skillset and market experience to make timely investment decisions. This ensures that retail investors are no longer behind the eight ball.
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Another reason why mutual funds can make you rich is because of their ability to diversify risk. Unlike individual stocks, a mutual fund invests in a portfolio of 50-60 stocks (at times even more). These stocks are further divided into various sectors that have a negative correlation, so even if one sector fails to perform, the outperformance of the other sectors can help mutual fund investors earn decent overall returns.
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Imagine if you are bullish on MRF Ltd, whose share price is Rs 73,795 as of 7th December 2021. But unfortunately, you only have Rs 5,000 to invest. What do you do? Since you cannot buy partial shares, you may have to let go of this opportunity. But this is not the case with mutual funds. You can consider investing in a mutual fund scheme that invests a considerable portion of its assets in MRF Ltd. and benefits from the bullish outlook on the stock.
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Another huge advantage of mutual funds is that they help keep the cost of investing low. The systematic Investment Plan (SIP) facilitates rupee-cost-averaging, which is an investment strategy in itself to deal with market volatility and lowers your overall cost of acquisition, particularly when the markets are correcting.
[Read More: Best Mutual Fund SIP in 2021]
Unlike other "get-rich schemes" with numerous terms and conditions, there are only two tenets to getting rich with mutual funds -
Have a long-term investment horizon: Do you know who is the most successful investor of all time? If you think the answer is Warren Buffett, then sadly you are wrong. Throughout his investment tenure (close to three-quarters of a century), Warren Buffett managed to generate a compound annual growth rate of 22%, which is decent, but nothing compared to the 66% CAGR generated by Jim Simmons.
That said, Jim Simmons is nowhere in the top 50, while Warren Buffett features on the list of the wealthiest men on the planet. Why? Because the biggest catalyst in getting rich whether through mutual funds or any other investment avenue is that you have to give your investments the time to grow. So, while Warren Buffett had a time horizon of more than 70 years, Jim Simmons had a time horizon of only 15-20 years. Hence, despite generating superior returns, Jim Simmons corpus is substantially lower than Warren Buffett's' corpus.
While generating high returns is important, giving your investment time to grow is critical when creating wealth. The table below shows how time horizon trumps returns when it comes to getting rich with mutual funds.
|
Mr Early |
Mr Late |
| Investment Tenure |
30 years |
20 years |
| Return on Investment |
15% |
20% |
| Investment per month |
Rs 5,000 |
Rs 10,000 |
| Corpus |
Rs. 3,50,49,103 |
Rs. 3,16,14,794 |
(The above table is for illustration purposes only)
Mr Early invested 50% less than Mr Late. His return on investment is also 5% less than what Mr Late earned. But look at the corpus at the end of the investment period. While Mr Early managed to create a corpus of Rs 3.5 crore, Mr Late could only amass a corpus of Rs 3.16 crore, 10% less than the corpus Mr Early accumulated. This is despite Mr Late investing double of what Mr Early invested and generating 5% additional returns than Mr Early. This is the advantage and power of a long-term investment horizon. So, the easiest way to create wealth with mutual funds is to maintain a super long-term investment horizon.
[Read More: Why Patience and Perseverance Are Important When Investing in Mutual Funds]
Invest in the best mutual fund schemes: Charlie Munger once said, "The first rule of compounding is to never interrupt it unnecessarily". And the only way to never interrupt compounding is to invest in the best mutual fund schemes with all your conviction.
How do you know which are the best mutual funds that can make you rich? You can follow the guidelines below while selecting the best mutual funds for the long term:
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Best mutual fund schemes are those that come with a high AMC pedigree. This is important for two reasons - firstly, a well-established AMC will have tried and tested investment processes that have manoeuvred through bull and bear market phases; and the second reason is that such AMCs have the resources to recruit top talent when it comes to the fund management team.
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A key parameter while searching for best mutual funds is to ensure that the fund has a minimum assets under management (AUM) of more than Rs 500 crore. Do note that an AMC with high AUM can ward-off or resist redemption pressure and the fund manager has the leeway to stay invested in the stocks for the long term.
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Best mutual fund schemes must generate consistently good benchmark-beating returns. In other words, consistent alpha generation is necessary. So, don't get impressed by a fund's one-year or two-year performance. At times, you will also encounter funds with huge AUM but check for their year-on-year returns. For example, HDFC Midcap Opportunities Fund - Direct - Growth has an AUM of Rs 31,629 crore which is one of the highest in the midcap category. But take a look at the performance of the fund over the years, in Graph 1 below:
Graph 1: A detailed look at the yearly performance of HDFC Midcap Opportunities Fund
Data as of 6th December 2021
(Source: ACE MF, PersonalFN Research)
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The best mutual funds should also have a track record of performing across bull and bear market phases. When you are investing for the long-term (more than 10 years), you and your mutual fund scheme are bound to encounter both bull and bear markets. And while a majority of mutual funds will perform in bull markets, the critical question is, 'can your mutual fund scheme withstand bear markets?' That will distinguish the men from the boys. A quick disclaimer here, when we say withstand bear markets, the reference is not to mutual fund schemes that do not fall when the overall market is down. Expecting this is a bit irrational. Instead what we are referring to is funds that fall lower than their benchmark index during bear markets. Canara Robeco Bluechip Equity Fund is one of the best large-cap funds for this reason. It has managed to beat its benchmark during bear markets
Table 1: Canara Robeco Bluechip Equity Fund performance across bull and bear market phases
|
Bull Market |
Bear Market |
Bull Market |
Bear Market |
Bull Market |
Bear Market |
Bull Market |
| From |
09-03-09 |
05-11-10 |
20-12-11 |
03-03-15 |
25-02-16 |
14-01-20 |
23-03-20 |
| To |
05-11-10 |
20-12-11 |
03-03-15 |
25-02-16 |
14-01-20 |
23-03-20 |
05-07-21 |
|
|
|
|
|
|
|
|
| Canara Robeco Bluechip Equity Fund |
- |
-13.02% |
25.19% |
-20.59% |
18.90% |
-30.52% |
73.54% |
| Large-cap Category Average |
74.78% |
-23.49% |
26.93% |
-19.11% |
16.29% |
-34.76% |
72.36% |
| S&P BSE 100 - TRI |
83.58% |
-26.25% |
26.30% |
-21.53% |
17.29% |
-38.01% |
80.37% |
In the bear market between 5th November 2010 and 20th December 2011, Canara Robeco Bluechip Equity Fund generated a negative return of 23.49%, though it was a poor performance, it was much better than the benchmark return of (-) 26.25%.
[Read More: Best Large-cap Funds to invest in 2021]
So, the best and (arguably) the only way to get rich with mutual funds is by investing in the best mutual fund schemes and staying invested for as long as possible and choosing a scheme that has delivered appealingly consistent returns over the long term.
While we have listed down the features of the best mutual fund schemes in 2022, it would be irrational of us to think that you will be able to discover the best mutual fund schemes from more than 2,500 mutual fund schemes in the mutual fund universe. But we have you covered as we reveal the list of best mutual funds to get rich in 2022.
These mutual funds have the potential to make you rich provided you follow the two tenets of wealth creation: 1) Investing in only the best mutual fund schemes; and 2) Staying invested for the longest time period.
Table 2: List of best mutual funds that will help you get rich in 2022
Data as of 6th December 2021
(Source: ACE MF, PersonalFN Research)
Mutual funds are a breath of fresh air for retail investors struggling with individual stock investing. They are affordable, convenient, help diversify the risk, and keep the cost of investing low as far as possible -- which is paramount for retail investors when planning to get rich and accomplish the envisioned financial goals.
If you as an investor are able to identify the best mutual funds and have the courage to stay invested for the long term, then there is no limit to the wealth you as a retail investor can create. For example, if you had invested Rs 1 Lakh in UTI Mastershare Unit Scheme on 18th October 1986, then the value of your investment today would be worth a whopping Rs 20.38 Lakhs! (considering the NAV of Rs 203.8437 as of 6th December 2021).
The fund has generated a return of 17.75% since its launch. Assuming the fund continues generating the same return over the next few decades, a SIP of Rs 5,000 in the fund over the next few decades will resemble something like this -
| Investment Tenure |
Future Value |
Investment Amount |
| 10 years |
Rs. 16,54,794 |
Rs. 6,00,000 |
| 20 years |
Rs. 1,12,92,441 |
Rs. 12,00,000 |
| 30 years |
Rs. 6,74,22,835 |
Rs. 18,00,000 |
| 40 years |
Rs. 39,43,30,538 |
Rs. 24,00,000 |
(The above table is for illustration purposes only)
We understand that a corpus of Rs 39 crore in 40 years seems far-fetched, but this is pure math and no marketing gimmick. You can do the calculation yourself with our SIP calculator. But trust us, an investment of Rs 24 lakhs can create a corpus of Rs 39.43 crore in a period of 40 years if you are invested in the best mutual funds. This is why mutual funds are said to be a potent avenue for wealth creation.
But mutual funds won't help you get rich quickly unless you make efforts on your part to save and invest meaningfully with all the diligence. A Caveat emptor here is that not all mutual funds will create wealth for you. You need to identify and invest in only the best mutual funds with the potential to make you rich. Once you invest in the best mutual fund you will require reviewing your mutual fund portfolio scientifically to ensure you are on the path to getting rich and achieving financial freedom. Keep practising the art and science of investing in the best mutual fund and adopt patience for money to grow. Patience is the biggest and the toughest virtue when it comes to investing.
How do you find the best mutual funds that can help you get rich?
Simple, with PersonalFN.
Simply subscribe to PersonalFN's premium research service, FundSelect.
PersonalFN's FundSelect service provides insightful and practical guidance on which mutual fund schemes to Buy, Hold, and Sell.
We will also help you choose some of the best Equity Linked Saving Schemes (ELSS) for your tax-saving with PersonalFN's premium research service, FundSelect.
At PersonalFN, we follow a S.M.A.R.T Score Matrix, wherein we evaluate the following:
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S - Systems and Processes
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M - Market Cycle Performance
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A - Asset Management Style
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R - Risk-Reward Ratios
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T - Performance Track Record
This stringent process has helped our valued mutual fund research subscribers to own some of the best mutual fund schemes in their investment portfolio with a commendable long-term performance track record.
Currently, with the subscription to FundSelect, you could also get free access to PersonalFN's Debt Fund recommendation service DebtSelect.
Under DebtSelect, we give high weightage to schemes displaying worthy portfolio characteristics. We avoid debt mutual fund schemes that chase higher yields by taking undue credit risk with substantial exposure in instruments issued by private issuers.
PersonalFN's FundSelect service is apt if you are looking for insightful guidance and recommendations on some worthy mutual funds.
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Happy Investing!
Warm Regards
PersonalFN Content & Research Team
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