Mutual Funds: Can they really simplify your journey to financial freedom?

In the modern financial landscape, attaining financial freedom is an aspiration shared by many. Financial freedom refers to the ability to live life on your own terms, unburdened by financial constraints.

It is an age-old adage that money cannot buy happiness, however, it undeniably provides the means to secure the things that contribute to a fulfilling life. True financial freedom, therefore, is being able to create sufficient wealth to ensure that the needs and desires of your family and yourself are met without financial worry.

There can be several paths to attain financial freedom – investing in quality stocks, acquiring income generating real estate and reinvesting that income, participating in government sponsored schemes, mutual funds, etc. However, some of these avenues, like direct stocks or real estate investments, require time, expertise and resources, making them less accessible to the common.

Mutual funds, on the other hand, offer a practical and efficient route for the common investor to attain financial independence. Before delving into why mutual funds are effective, let's first explore the journey towards financial freedom.

For a common man, the road to financial freedom is a marathon, not a sprint. It needs diligent financial planning, disciplined savings, regular investment and often, the willingness to make necessary sacrifices; curbing unnecessary expenses, and prioritising needs over wants.

Much like the sacrifices made by freedom fighters to secure the nation's independence, these small sacrifices today can pave the way to achieve financial freedom in the future.

Democratising investment

Historically, the stock market has been an exclusive domain, accessible primarily to those with the means to navigate its complexities. Opening demat accounts, maintaining broking accounts, and meeting income thresholds were barriers that kept many out of the market. Mutual funds have revolutionised this landscape, lowering the barriers to entry and democratising access to wealth creation.

With mutual funds, things are different. Today with a completed KYC (Know Your Customer) process, anyone can begin investing in mutual funds with as little as ₹500. This accessibility has opened the doors to the stock market to all classes of investors, empowering them to build wealth. The mutual fund industry’s growth over the past decade is a testament to this democratisation.

The average assets under management (AUM) of the Indian mutual fund industry has grown from ₹10.06 lakh crore as on July 31, 2014, to ₹64.97 lakh crore as on July 31, 2024 – a more than six-fold increase in a span of ten years. This explosive growth reflects a broader participation in the market and significant wealth creation across the country.

Moreover, mutual funds cater to a diverse spectrum of investors. Whether one is conservative, aggressive, or somewhere in between, there is a fund category tailored to their risk profile and investment goals.

Eighth wonder

Compounding is often referred to as the ‘eighth wonder’, underscoring its critical role in wealth creation. The difficulty of building wealth multiplies without the benefit of compounding returns.

Over the past couple of decades, mutual funds have provided investors with a powerful tool to harness the benefits of compounding, particularly through Systematic Investment Plans (SIPs).

SIPs, which involve investing a fixed amount of money at regular intervals, offer the dual advantage of rupee cost averaging and fostering disciplined investment habits; both crucial for achieving financial freedom. Regular contributions through SIPs not only smooth out market volatility but also amplify the power of compounding, accelerating the path to wealth creation.

Risk management is integral to successful investing. One of the most effective strategies for managing market risk is diversification. Almost all mutual fund schemes focus on diversifying their investments across sectors and within sectors, thereby mitigating the impact of volatility and reducing risk exposure for investors.

Mutual funds have emerged as a pivotal tool in the pursuit of financial freedom. By democratising access to the stock market, offering tailored investment options, and leveraging the power of compounding and diversification, mutual funds empower individuals to achieve their financial goals. In an era where financial independence is synonymous with personal freedom, mutual funds stand out as an essential vehicle for wealth creation and security.

Shrinivas Khanolkar, Head – Products, Marketing & Corporate Communication, Mirae Asset Investment Managers (India)