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Monday, July 15, 2024

Which Mutual Funds Can Help Accelerate Wealth Building?

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What are mutual funds?

Imagine you and your friends put your money together to buy a big toy you all can share. That’s what a mutual fund is like. According to Investopedia, a mutual fund is a way for people to pool their money to invest in things like stocks, bonds, and other assets.

People who know a lot about money, called money managers, handle this pooled money. They try to make more money for everyone who invested.

The fund’s investments are chosen to meet specific goals, which are explained in a document called a prospectus.

Think of professional investors like Stanbic IBTC and ARM as the smart kids who know how to spend your money wisely on things like gold or Tesla stocks.

We trust them because they use careful methods to decide where to invest. Many of them do a lot of research before making any decisions, which helps increase the chances of making a profit.

However, mutual funds are not 100% guaranteed to make money. For example, in 2023, some mutual funds lost money like the Mirae Asset Hang Seng TECH ETF, which lost 11.76%, and the Nippon India ETF Hang Seng BeES, which lost 10.65%, according to the Indian Times.

How to invest in mutual funds

Nowadays, investing in mutual funds is super easy. You don’t have to fill out a bunch of papers anymore. You can do it right from your phone!

Apps like Cowrywise, Piggvest, and Bamboo let you invest in mutual funds with just a few taps. You can do it from the comfort of your home.

Typical mutual fund returns

When you invest, the money you make is usually related to the risk you take. For example, cryptocurrencies can give you big profits but also big losses very quickly.

Mutual funds don’t usually offer very high returns, but they are also less risky. Many mutual funds have a limit on how much money you can lose.

Let’s look at some examples from Nigeria. The Stanbic IBTC absolute return fund gave a return of 6.86% in one year. Another fund called the Stanbic IBTC aggressive fund gave a return of 49.9%.

As we can see, most funds give returns between 4-15%, but some can give as high as 50%. However, funds that offer higher returns also come with higher risks.

What is my definition of “get rich quick”

Many people think getting rich quickly means getting rich easily. But that’s not true. You can get rich fast, but it’s usually not easy.

Getting rich slowly means getting a job, working for many years, and then retiring with some money saved.

Getting rich quickly means shortening this process. You could have a high-paying job, start and sell a business, or solve big problems and get paid well for it.

According to Statista, about half of the 3,194 billionaires in the world are between the ages of 50 and 70.

It’s clear it’s possible to get rich while you still have plenty of life left.

Getting rich takes time and effort. It is a process that you have to follow step by step.

Get rich quick vs scam opportunities

If someone says they can double your money quickly but you have to bring in other people, it’s probably a scam. These schemes look easy and promise high returns with little effort.

A real scam is easy to spot: they promise you 100% guaranteed returns and ask you to do little in return. For example, just give your money and sit back and relax while they make you rich. Does that sound familiar?

Scam owners need to keep bringing in new people to pay out the old ones. They offer big rewards for bringing in new people. If you look closely, you can usually tell a scam from a real investment.

Wealth accumulation vs wealth preservation

Think about what you want to do with your money. Are you trying to keep what you have, or do you want to make more money? Knowing this is important and can save you a lot of stress.

If you have a normal job and struggle to save, your goal should be to grow your money rather than just keep it safe.

People with little to save often get disappointed when they invest in things that only preserve wealth like treasury bills.

Why mutual funds cannot make you rich quick

Let’s say you earn N2m a year and save N1m of it. To save N100m, you’ll need to do this for 100 years. Clearly, only saving won’t make you rich quickly.

Now, if you invest that N1m in a mutual fund with a 5% return, it would still take you around 94 years to reach N100m!

According to Statista, the life expectancy in Nigeria is about 53 years for females and 52 for males. This means you would need two lifetimes to get wealthy through mutual funds.

How to take advantage of mutual funds

The truth is, very rich people didn’t get wealthy from mutual funds. They got rich by starting businesses and making a lot of money. Only then did they look into mutual funds and other safe investments. For example, if you start with N100m and invest in a mutual fund, you could make an extra N62m in 10 years.

Mutual funds make sense when you already have a big amount of money. It’s hard to get rich quickly by only investing small amounts like N100k.

Building your financial nest egg

You can build your financial nest egg through things like an inheritance, a high-paying job, settlements, unexpected gains like winning the lottery, or selling a business.

If you have a low-paying job, upgrade your skills for better opportunities. Or, start small investments for little returns to help pay your bills. But don’t expect to get rich from these right away.

If you own a business, think about ways to grow it. More stores are better than one. Use the internet to reach more customers.

In summary, mutual funds are relatively safe but they don’t offer huge returns. They are good for covering small bills but not for getting rich quickly!

You need a bigger amount of money to take full advantage of mutual funds.

Good luck in building your wealth!

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