Mutual Funds- secrets for wealth creation

Mutual funds have the potential for wealth creation. However, before going into the fascinating world of investment, you should equip yourself with essential knowledge.

There was a poor fisherman who lived in a village. He always wanted to be rich and worked hard for it. Early one morning he went to the river before sunrise. When he walked through the bank he felt something underfoot and found it to be a small sack of stones. He picked up the sack and as he was waiting for the sunrise he started to throw those stones into the river one by one. 

He kept tossing those stones into the water lazily until it became light. By that time, he had thrown all the stones into the river except one. In the sunlight, the fisherman looked at his hand and realized that what he was holding was a diamond.

Sometimes, this can happen to you too. You may be resourceful. But if you are not intelligent and not realizing the right value of your resources, your dreams will remain as dreams only. So, the selection of ways to achieve your dreams is very important.

Things you need to know before investing in mutual funds

The time horizon of your goal

As everyone’s definitions of being rich are different, every person’s goals and dreams are different. Maybe you have short-term goals like your marriage or a vacation, medium-term goals like buying a car or long-term goals like planning for your retirement or the education of your kids.

The selection of the mutual fund should be based on the time horizon of your goal. Equity mutual funds are safe for your long-term dreams. But debt mutual funds will help you to achieve your short-term dreams. To identify the best mutual fund, you must consider the time horizon of your financial goals.

Your risk tolerance

How much will you suffer from heartache if your mutual fund gives you a negative return and crashes your dreams? An investor has two options. Either he can be a conservative investor or he can be a risk-loving investor.

Risk and return have a positive relationship. You can reap a good return from a highly risky investment and if the risk is low, your return will also be low.

Expense ratio

As an investor, you have to pay a fee to the mutual fund company to manage your money. This fee is known as the expense ratio. You have to pay this fee every day irrespective of the performance of the mutual fund.

So you should be very careful before selecting a fund to invest in. A fund that promises good returns with a minimal expense ratio would be a good choice.

Inflation in the economy

Inflation or the increase in the price level in the economy can affect your investment return negatively. When there is inflation, there will be an increase in the cost of commodities which will lead to a decrease in the actual value of your return.

Unexpected inflation can break all your plans and dreams. One of the most intelligent ways to defeat inflation is to select a long-term equity mutual fund for your investment.

All your returns depend on the excellency of the fund manager and the trustworthiness of the mutual fund company. So do thorough research before you proceed with your decision regarding the investment.

Of course, you can create wealth by investing in mutual funds. But if the money that you invest is not managed well, a high loss is also possible. Don’t throw away your diamonds, use them wisely.