Mutual funds allow you to invest in small amounts and seize the compounding growth, and experts help tackle volatility and asset allocation, making them a potent tool to create wealth.
The benefits from stock investments—an instrument known for boosting personal wealth markedly over a longer period—has been tasted by just a small section of society. Restricted information along with the need for substantial capital is to be blamed. This trend, however, is seen to be shifting in recent years with the growing prominence of domestic mutual funds.
Over the past two decades, mutual funds, once a minor player at the beginning of the century, have become key to institutional investors. As of June 2024, the total portfolio value of domestic mutual funds in BSE 200 stocks (the most liquid investment universe in the Indian market) was $383 billion, compared to just $8 billion in 2004. This remarkable increase has attracted new investors to mutual funds, supporting their wealth creation journey and helping them achieve their financial goals.
Mutual Funds (MFs) are a suitable route for average investors seeking to create wealth from stock markets, for many reasons. Firstly, MFs allow an individual to start investing with a small amount—based on their current income, the investment can gradually increases as the income grows. This route gives opportunity for early investment plans, unlike other routes where one needs to first accumulate substantial money before starting to invest. Secondly, MFs are managed by professionals who are adept at handling market volatility and asset allocation across different market cycles, unlike individual investors who often buy during market highs and sell during lows.
The SIP route has become a preferred method for achieving financial freedom and enhancing personal net worth due to its ability to accommodate small, consistent investments over time, which can be increased with growing income.
As more people recognize the benefits of MFs for effective wealth creation, there has been significant growth in Systematic Investment Plans (SIPs), the safest method of MF investment. In the past five years, SIP accounts clocked a Compound Annual Growth Rate (CAGR) of 28%, a record high of 96.13 million. As of August 2024, the Assets Under Management (AUM) of SIP-linked funds amounted to Rs 13.38 lakh crore, representing one-fifth of the total MF AUM of Rs 66.70 lakh crore, which includes equities, debt, passive products and closed-end funds. The SIP route has become a preferred method for achieving financial freedom and enhancing personal net worth due to its ability to accommodate small, consistent investments over time, which can be increased with growing income.
For instance, if an investor consistently contributes Rs 10,000 every month for 20 years with an expected annual return of 12-15%, they could accumulate a corpus of Rs 1 crore This disciplined approach to investing highlights the power of compounding, where consistent contributions over time can lead to significant wealth accumulation, emphasizing the importance of starting early and staying committed to one’s financial goals. Equities, which have grown at a CAGR of 13-14% over the past decade, are among the best-performing asset categories, while traditional savings instruments like Indian fixed deposits have lagged significantly, with taxation further widening the gap. Consequently, the share of fixed deposits is gradually shifting towards equities due to the favourable risk-adjusted returns, with some companies experiencing earnings growth exceeding by as much as 20%.
India’s MF AUM to GDP ratio stands at 15%, significantly lower than the global average of 75%, while the average SIP portfolio value is Rs 136,276 compared to Rs 478,000 for the fixed deposits. Hence, despite a 33% CAGR seen in MF AUM over the past five years, the MFs industry still has considerable potential for recording further growth in the future.
Disclaimer: The Views are Personal and not a part of the Outlook Money Editorial Feature