Mutual Fund Wealth Creators
Ninad RamdasiCategories: Cover Stories, DSIJ_Magazine_Web, DSIJMagazine_App, MF - Cover Story, Mutual Fund
Mutual funds are one of the most effective instruments for building wealth over time. Indeed, for people with little or no expertise of financial markets, mutual funds are a godsend. Furthermore, you don’t have to be affluent to become wealthy. The mutual fund SIP path is the finest approach to begin your wealth creation journey. With all of these advantages, it is critical to understand which funds to invest in. On the occasion of the 1,000th issue of DSIJ, Henil Shah identifies some top wealth-creating mutual funds across categories.
Trade and commerce enable us to build wealth by investing our money with folks who are also building wealth. By purchasing stocks in various companies, we may become investors in the businesses of entrepreneurs. The shareholders gain when entrepreneurs and management operate their companies effectively and successfully. Mutual funds are an excellent strategy to accumulate money in this aspect. But how can we determine which stocks to buy and when to acquire them? This is when seeking expert assistance comes into play. They also use a huge corpus to investigate more opportunities at the same time.
We all require proteins, vitamins, carbohydrates, and so on, much like a balanced diet. Eating only one kind causes nutritional insufficiency. Similarly, with a diversified mutual fund portfolio, you are exposed to several aspects of the economy while still being safeguarded from any potential downside. On the occasion of the 1,000th issue of DSIJ, we will go deeply into understanding the performance of the mutual fund industry as a whole, as well as identify top wealth-creating mutual funds across all asset classes, including equity, debt and hybrid. Furthermore, this narrative might be used as a practical guidance for purchasing mutual funds.
So, without further ado, let us begin. In terms of assets under management (AUM), the industry grew 3.92 per cent year-todate (YTD), while registering a remarkable compounded annual growth rate (CAGR) of 17.8 per cent. This contains all major and sub-categories as specified by the Securities and Exchange Board of India (SEBI). The graph below depicts the increase of AUM over the previous decade.
The table above depicts the change in the AUM of asset management companies (AMCs) over the last four quarters. The most startling discovery is that the highest performers were those who did not belong to the top 15 club, based on AUM. In fact, Quant Mutual Fund was able to acquire ₹7,853 crore in the past four quarters due to its outstanding performance. This equates to a 237.91 per cent gain in AUM. Navi Mutual Fund, PGIM India Mutual Fund and PPFAS Mutual Fund followed. These asset managers did reasonably well. Every investor desires to build wealth for a secure future. However, few succeed owing to a lack of skill and sufficient knowledge. Although there are other paths to long-term wealth accumulation, the mutual fund route is the most practical and effective. Our genuine efforts in the following paragraphs will be to assist you comprehend mutual funds in more depth.
Understanding Mutual Funds
Simply explained, a mutual fund is a group of investors that pool their money. This pooled money is given to a fund manager to manage and grow in a methodical manner. This pooled money is subsequently invested by the fund manager in either stocks, bonds, money market instruments or a combination of all of these, depending on the kind of mutual fund. The whole pooled sum is split into units. When you purchase a mutual fund for a given amount, you are assigned units of mutual funds equal to the amount divided by the price. The net asset value (NAV) is the price of a unit. As the price of the underlying investment assets (stocks or bonds or both) rises over time, so will the NAV of your mutual fund unit. You make money when you sell at a higher NAV.
Types of Mutual Funds in India
One of the key aspects of the Securities and Exchange Board of India’s (SEBI) circular on mutual fund rationalisation is that various mutual fund schemes must be clearly differentiated in terms of investment strategy and asset allocation. The schemes are grouped roughly into the following categories:
■ Equity Schemes
■ Debt Schemes
■ Hybrid Schemes
■ Solution-Oriented Schemes
■ Other Schemes.
Furthermore, these broad groups have been further subdivided.
Reasons to Invest in Mutual Funds
Investing in a mutual fund has several advantages. Some of the most notable are listed below.
■ Better Long-Term Returns — No other asset class has given superior long-term returns than equities. Equity is the finest asset class for accumulating wealth. If you want to invest for the long term, stocks are your best choice. And what better way to invest in stocks than through a professional fund manager?
■ Fits all Financial Needs — The beauty of mutual funds is that there is a mutual fund for every financial need and financial goal. Looking to save for retirement, purchasing a house in 10 years, going on a trip in six months, or paying for your child’s education? All of them are covered by mutual funds.
■ Highly Liquid — Another essential feature of mutual funds is their strong liquidity. You may sell your units whenever you want and receive your money back. Liquidity is critical. Consider the real estate market. What if you are unable to sell your property investment when you want funds? Mutual funds are not in this category
■ Unmatched Ease and Simplicity — Investing in mutual funds is really straightforward. It’s also 100 per cent paperless if you do it using an online platform. Most of us lack the necessary competence to participate in the equity markets. Mutual funds provide us with a solution by harnessing the knowledge of a fund manager. You are not required to actively manage your money
"Equity mutual funds are the perfect solution for people who want to own stocks without doing their own research." — Peter Lynch
Setting Targets with Mutual Funds
Mutual funds can benefit you no matter what stage of life you are in or what your investing goals are.
Working Individual : When you begin working, you may set foot on an investment path to build financial discipline. You are accountable for controlling your spending as a working individual. And if you lack discipline in controlling your expenditures, you are more likely to spend your money on items you don’t need. As a result, it is strongly advised that you begin planning for life’s milestones as soon as you begin earning.
Married Individual: Going from one to two means taking on more financial responsibility. People then start to plan for the extra expenses that could occur along the road. A new house, a car and more holidays become visible in the horizon. Mutual funds can assist you in setting different goals for each of your ‘big ticket’ purchases.
New Parent: The next financially debilitating milestone is becoming a parent. From hospital costs to diapers to school fees, you will need a lot of money to get through this long period. As a result, it is advised to begin investing at least five to seven years in advance. Again, good mutual fund investment can help you get through the early parental expenditures.
Planning for Children: Being a parent is difficult. You must face the expenditures of your child’s education and marriage in short succession when they are in their twenties. This is another costly endeavour. You should start planning for these two critical milestones as soon as you become a parent. It is advised to plan for these two financially demanding milestones at least 15-20 years in advance.
Planning for Retirement: Retirement is a time to relax. But first, you must place yourself in a financial situation that allows you to relax. The first step is to avoid being a financial burden on your children and to support yourself in your later years. Mutual funds are your best choice for meeting your retirement objectives. All of these cues and intricacies have been thoroughly discussed in our previous editions.
Post-Retirement: When you retire, your investments do not come to an end. If you retire with a corpus, you should arrange your post-retirement life accordingly. Keeping that corpus in your savings account would only ensure that it does not last as long as you do! Again, mutual funds can assist you in generating a consistent income during your post-retirement years.
Best Performing Mutual Funds across Categories
This section will showcase the top performing mutual funds in each category. This list is the result of a thorough assessment of funds considering both returns and risk. For screening, only open-ended actively managed equity, debt and Hybrid Funds were considered. We have taken into account both short-term and long-term trailing returns. Apart from returns we have also considered funds’ risk parameters. We evaluated these funds’ standard deviation and beta to understand risk. Furthermore, we put these funds through a risk-adjusted returns test, as determined by the Sharpe and Sortino ratios. However, it is to be noted that it is in no way any recommendation. Investors are advised to apply their own discretion before investing.