It is virtually impossible to determine with 100% accuracy the full success of investments in
mutual funds, no matter how many people are in the market or not. The main reason is it is a platform where there is no constant, for every one minute, there is a change in the market, which causes rise and fall in the shares, and their investment will be lost and gained.
The funds are present to take care of the money of people who don’t have time or have some or any expertise to invest in stocks. They can give you returns that will
beat inflation most of the times, and you can increase your money by anywhere
between 12% to 24% over 5 to 10 years depending on your timing of the purchase of it.
The above returns surely are not worst. But two problems are most
likely to hit and prevent you from getting super-rich, out of the league they are:
1) Timing of purchase: You are not expected to get the right timing every-time.
Those who bought stocks in 2001 & exited in 2007 end can understand how
critical the timing can be. They made 25% to approximately 35% returns
compounded annually. However, those who invested in 2007 and exited in
2013 pretty much were sitting on the same sum of money in a 6 to 7 year
period. In the long run, the timing is improbable to be perfect for anyone.
So, the returns are not likely to be the ones that the fund managers like to
display with the benefit of hindsight. SIP further averages this out & lowers
the return.
2) Diversified investments: What mutual funds do is that it diversifies your
investment, which saves you from the downside of concentrated investment
in a few lesser stocks or poor selection. However, what it also does is that it
prevents you from the supernormal profits that can be gained by a great
variety of stocks.
3) 3) Mutual Fund regulations: Even if you get perfect timing as said above,
you will not get super-rich like Warren Buffet since mutual funds are highly
regulated by govt. All this is for the safety of the investors since, by design,
the funds are for non-savvy market investors. They would settle for
moderate returns, but can’t take high risks at the cost of losing a substantial
part of their capital. The net result is that most funds have an extensive portfolio of Blue-chip stocks which indeed preserve your particular capital, but also
prevent you from getting super normal returns from hidden jewels or
beaten down but good potential stock.
4) So Mutual Funds would make you earn above the fixed deposits or LIC
plans. However, it won’t make you very rich, like direct investing in stocks
can. This is common sense as well since nobody became rich by letting
other people manage their money.
By taking on a certain level of risk, you can put your current asset or assets to
work for you and generate short-term or long-term income, depending on your
investment goal. It is for this reason that riskier securities, such as
stocks are considered the go-to investments for people looking to
strike it rich.
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