Can Investing in Mutual Funds Make You Wealthy?
Investment is amongst the most popular methods for creating wealth. On taking a certain amount of risk, you have the option to engage your current assets on work for generating long-term or short-term income based on your investment objectives.
Obviously, the higher the amount of risk, the greater are your chances of failure and success both. This is why the people who wish to strike it rich consider going for riskier securities like stocks while investing.
But the question here is,
Can mutual funds make you rich?
Generally, the mutual funds are considered to be safer and a more stable form of investment. Hence, these funds providing you with the aggressive wealth creation opportunities may sound counterintuitive.
However, the fact is that some types of mutual funds are equally risky, or even riskier, as compared to individual investment in stock. They have the capability of generating high returns.
Particularly, high-yielding bonds and stock funds are specially customized for generating the highest possible gains by making an investment in the riskiest of assets.
High-Yielding Bond Funds
High yielding funds, as is clear by the name, are inclined towards creating the maximum possible returns based on the income type pursued by the shareholder.
While the bond funds are usually considered to be amongst the safest kind of funds that provide a moderate income annually and ensure capital preservation, the matter of fact is that these bond funds can be pretty risky.
The funds, which are invested in those bonds issued by governments and highly-rated corporations will generate the major portion of their returns from the payments of interest. On the other hand, the funds being invested in low-rated bonds, known as the junk bonds, involve a shorter-term strategy for investment.
Rather than keeping a hold on the bonds till the time of maturity and collecting the yearly coupon payments, junk funds are capitalized on the volatility of the values of junk bonds. Since the default risk is pretty high, junk bonds are usually sold for way below their par value and offer very high interest.
With the change in the national rate of interest or the profit or loss credibility of the issuing entities, the market rate of such bonds may fluctuate big time.
The returns on junk funds are generated by buying economical junk bonds, enjoying the advantages of their generous coupon payments, while selling them away (hopefully on profit) before the organization defaults.
In case the issuing entity has become steady and there is an improvement in its credit rating, the junk bond value will rise considerably, creating even higher returns because of the bargain-based purchase price.
High-Yielding Stock Funds
There is a wide stock fund palette which aims at the specific goals of the investor. Now, the question is, how much money can you make with mutual funds?
For the investors who wish to earn the maximum amount of yearly investment income, the high-yielding dividend funds are focused on stocks that pay high dividends consistently.
The net gains on all mutual funds should be distributed to the shareholders at least once yearly so that a minimum of one dividend payment each year is made by high-yielding dividend funds.
The focus of such funds does not lie on too much on creating capital gains. Hence, they don’t trade securities very often, unless the dividends on a stock drop considerably. Definitely, these are not the most aggressive kind of funds. However, in case there is a significant amount of funds available with you for investing, the dividend income generated every year may be substantial.
Other types of high-yielding stock funds are focused on creating capital gains by using a very aggressive style of trading. This includes searching for the next huge stock actively and trying an upswing on the suitable time.
Such funds try to avoid stocks, which are estimated to have a big drop. These funds need an active manager with a sufficient amount of experience as well as a keen instinct. This category of stock funds involves a very high degree of risk as compared to dividend funds. But, at the same time, they offer better opportunities for fast and substantial gains.
For Moderate Investors: Balanced Funds
The people who are not ready to take very high risks in high-yield funds, there are various other mutual funds’ options, which offer the opportunity to earn huge gains along with stability. The balance funds invest in both equity and debt. These funds can be customized to the specific objectives and risk endurance of the shareholders.
Those investors who wish to invest in high-rewarding funds but do not want to risk too much, the funds that include high-yielding securities but play it safe relatively can be a good option.
For instance, a fund may first invest in stable bonds with a proven track record, but also keep aside a part of its capital for investing in highly volatile stocks like junk bonds. Although the potential of high wealth creation is pretty limited, these funds are capable of offering long-term stability with a very low amount of risk.
Money Market Funds and Low-Risk Bonds
There is a common rule when it comes to investment, the higher the amount you put in, the higher would be your potential return. It obviously would be difficult to become wealthy by investing as low as 1,000 dirhams in any kind of security.
In case, there is a considerable amount of funds available to you for investment, you can earn a good amount of income even on highly stable investments.
It wouldn’t be appropriate to call the money market funds and low-risk bonds the heroes of wealth creation. However, they offer a high rate of stability and a fixed income every year. In case you have a sufficient amount of funds to invest, even moderate rates of interest can create huge sums.
Remember, the wealthier you are in the beginning, it would be easier for you to become rich within a short time.
The Effect of Management Fees
When you create wealth through mutual funds, it is necessary that you consider the effect of the expense ratio of funds. Generally, more funds that are actively-managed like stock funds and high-yield bond, may have higher expense ratios showing greater trading charges.
In case the expense ratio of a specific fund is high, it may eat into your annual gains substantially. There are brokers and firms whose objective is to keep down the costs and ensure that the investors are aware of what they are paying and receiving.
Some would also attempt to do more than matching the market while going up and beating it while coming down. This can be done by careful portfolio management and asset allocation. There are not many such firms that operate in such a manner. However, they do exist and finding them can be worthwhile.
In a Nutshell!
Answer to the question can mutual funds make you rich is yes. However, it totally depends on your risk tolerance, funds available to you for investment, and your investment objectives. Make sure that you make a well-informed and smart investment decision. Otherwise, your investment can backfire instead of giving you the desired returns.