Mutual Funds- How I attained financial independence

The demands present corporate world jobs, layoffs, the uncertainty of small business incomes have made people think about the early retirements or secondary income sources. Most youngsters think of leaving the rat race but do not know how to do it. I was also from the same camp and fortunately for me I have been able to start early and that too with a product (Mutual Funds) which improves the possibility of attaining financial independence manifold when compared to other available options.



My Story

It has almost taken me more than a decade of investments in mutual funds before I could share my experiences. My main objective is to help others to replicate the success I have achieved with the help of this great investment option to attain financial independence. Considering the long term nature of investment it is the time one should require to experience the power of the “Eighth wonder of the world” i.e. “Compounding”

In the words of famous Scientist Albert Einstein

Compound Interest is the 8th wonder of the world. He who understands it earns it; he who doesn't pay it.

Mr. Einstein has my vote in his favor along with millions of others who have experienced the same.

I had started investing in mutual funds for tax-saving purposes and later realized that it is a great tool to attain what I aspire for the most i.e. to retire early. I wanted to leave the rat race as soon as possible. I have been able to generate decent returns with simple principles which I shall be discussing in detail in subsequent articles and I have done it all by myself except the first tax saver investment by one of my friends. I know many people who have made fortunes with investment and have done all it by themselves.

The Present Scenario

During the journey, I have helped some of my friends, colleagues to start investments in mutual funds. I have realized that despite the fact they were all well educated they had no exposure to equities/mutual funds mainly due to ignorance and family influences.

The past generations have always preferred fixed deposits, Recurring deposits, and Public Provident funds, etc. over Mutual funds due to low volatility in returns. I have used the word “low volatility” as these financial products also come with some volatility without us being aware of it. The banks change interest rates periodically and the long-term trend is downwards. Bank fixed deposit rates have declined from 10%-12% during two decades ago to 5%-6% at present. With this kind of return, no one can think of early retirement.

The only solution for an average middle-class person is to take the benefit of mutual fund investing. However, the problem is the number of options available in the market. As per a report, there are more than 2500 mutual fund schemes in India so using the services of a certified advisor is always advisable. But it comes with its shortcomings. Most mutual fund advisors offer a scheme that benefits them more than the investor. I have observed the same looking at the schemes which these advisors have offered to some of my friends.

The best possible solution is to do it yourself as it is easy for the tech-savvy young generation. It doesn’t take much effort and not much technical knowledge. The simple principles can help generate long-term wealth.

Volatility

The volatility of returns is one of the major factors due to which many people avoid investing in the mutual fund. It is to be kept in mind that the mutual funds (Equity)* are for long-term investment and the long duration helps mitigate the volatility. It has been observed that the instances of negative returns are NIL for SIP of more than 4-5 years. The minimum returns which most of the mutual fund schemes have been able to generate are 10%-12% over the long term and one should keep his expectation in this range only.

The probability of better returns improves when the investments are increased during the period of distress.

*We shall predominantly be discussing equity mutual funds as equity is the best product to generate returns in the long term

Potential of Mutual Funds

I have chosen a random mutual fund with long existence in the following example. You may check the same for any mutual fund scheme with long existence. I want to clarify that it is in no way the recommendation for investment in the fund. You may choose funds as per your risk appetite once we discuss the basics of mutual funds investing in subsequent articles.

The fund I have chosen is the “Nippon India Growth Fund”. The fund was launched in October  1995. The following chart is the SIP chart available on moneycontrol.com. It can be observed that after 2004 the value of the investment has grown exponentially i.e. after 2004 the real effect of the compounding has been observed. Most investors fail to hold that long and hence are unable to generate large wealth. The annualized returns for the scheme up to March 2021 are app. 22%. The annualized return of 22% means that on average the fund has doubled the money every 3 years 4 months. The SIP has returned 3076.63% in absolute terms in 25 years and has beaten inflation by a good margin.


The chart above highlights the importance of mutual funds in early retirement. It is like that after a point your money starts working for you instead of you being working for money.

The Bottom Line

In the subsequent articles we shall be discussing practical aspects of mutual fund investing. I shall be discussing my experiences and how you can manage your finances yourself with simple rules. You can start with an investment of Rs. 5000 per month and increase the allocation once you gain experience and confidence.

If you are already invested in mutual funds through a financial advisor you should analyze your portfolio to ensure that it is best suited for you and not for your advisor.

So let us begin the Journey for early retirement and make money work for you.


Mutual Funds- What all you need to know (Do It Yourself)



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