First of all, you need to define what rich is—it may be different for different people. For most people, however, it may be about being able to comfortably fund the major events and goals of their lives.
If it’s about meeting all your life goals conveniently and living a hassle-free and comfortable life, then equity mutual funds are indeed a sure-shot way to get rich. Direct equity investment may generate more returns, but investing directly also requires one to have the requisite skills to read financial data and track ongoing market developments actively. People in full-time jobs may not have enough time to do so. For such people, equity mutual funds can prove to be of great help, as it allows them to offload their equity investing task of choosing the right stocks and investments to the fund managers of the scheme.
Choosing the right mutual fund schemes and linking them to various financial goals, such as emergency funds, children’s education, weddings, family vacations and retirement, among others, can work wonders in your financial planning. For instance, if you just had a baby and start a monthly systematic investment plan (SIP) of Rs 10,000 in an equity mutual fund for her, you can accumulate over Rs 60 lakh by the time she turns 18 years old. This amount of Rs 60 lakh is when you assume a conservative compounded annual growth rate (CAGR) of 10 per cent. You may accumulate as much as Rs 1 crore if your mutual fund scheme gives you a 15 per cent return over this period.
It doesn’t mean, however, that you scramble to land the top-performing mutual funds. A better approach is to calculate exactly how much you may require for a specific financial goal.
Importantly, assume conservative returns on your investment. This will tell you how much you need to set aside each month to accumulate your corpus. If your investments give you better returns than what you had originally assumed, it will be your bonus. There is no need to hunt for attractive investment opportunities all the time. Some vanilla investments linked to financial goals will do the job and make you rich—mentally and financially.
The author is the CEO of Edelweiss Asset Management Ltd.