Finance

Why are mutual funds considered as one of the tools for wealth creation?

The importance of wealth creation can be summed up by a statement made by legendary investor Warren Buffet – “If you don’t find a way to make money while you sleep, you will have to work till you die”.

The quote explains that a person who survives on salary with no money left over between paydays will sadly work until the day they die or rely on assistance from others when they can no longer work. One must save, invest, and build an income stream that makes money regardless of whether you work or not.

Mutual funds as an investment option for wealth creation can work due to compounding potential, easy liquidity, transparency in operations, diversification across assets, thus reducing risk, are managed by professionals, and require a low investment to start.

The following benefits and attributes of mutual funds highlight how they makes the wealth creation process a lot easier:

Linking investments with your future goals like foreign vacation trips, purchasing a new car, child’s education, child’s marriage, retirement funds and investing accordingly comes handy as it gives purpose to investing and avoids us from using the investments earmarked for important goals for our future for other short-term issues. Also, it guides us when to invest and when to withdraw thus making decisionmaking easy. Emotional biases tend to play an important role during investing, as we all wait for the market to fall to start investing or we avoid investing and wait for the market to recover. But ideally investors may invest when the market is low. Investment through SIP may also help to avoid this biasness and discipline in investing regularly.

  • Spending time more than timing the investment

Staying invested for a longer time gives investors a better experience and fruitful result rather than timing the market, as it is difficult to correctly predict market performance and returns. Instead, staying invested over a complete investment cycle could give better results.

  • Increase your investments in line with the increase in your income

If you are a salaried person, you would get an annual increment. If you increase your monthly investments by the same proportion as your annual increment every year, you may be able to save significantly more. Similarly, for a businessperson, an increase in investment should be made with increasing profits.

Wealth creation is a continuous process. You need to make a plan and stick to it so that you can meet all your goals. Plus, there is no one-size-fits-all wealth creation solution as each individual has unique goals, risk tolerance, etc. So, choosing the right investment that can help you achieve your goals plays a key role in ensuring you succeed in creating wealth over time. Investors should consult their financial advisor for a better understanding of this process.

Views are personal: The author- Pradyuman Kumar Jain of Namokar Investments is a Mutual Fund Distributor from Jaipur.

Disclaimer:
The views expressed are of the author and are personal. TAMPL may or may not subscribe to the same. The views expressed in this article / video are in no way trying to predict the markets or to time them. The views expressed are for information purposes only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you. There are no guaranteed or assured returns under any of the schemes of Tata mutual fund.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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