Special 300th Episode: Unlock Wealth Creation with Mutual Funds!

I thank you for being here, and I will just set the context. What are we going to talk about? How mutual funds come into play, and why it is not only critical but inevitable. If you don't invest, you're losing time. As you all are relatively young, I'll not scare you. Let me list down four or five things because we don't really think of money in that context. One is that the most dangerous myth is that playing it safe will take care of it because, in all other dimensions of life, playing it safe will take care of it. You work hard, you earn, you spend and whatever you save, leave it in the bank. This is actually a very dangerous myth. This is a myth because this is a recipe for remaining poor all your life. If you work hard, your money also needs to work hard. Second, the moment you try to get venturesome about your money, all the roads to enhance the return on your investment are filled with all kinds of land mines. Suggested read: Time, pragmatism and pessimism Most of the time, by remaining safe, you are basically losing on time. And for your investments to grow productively and become rewarding, time is the most crucial thing. You need time on hand for the investments to work to their full potential. Then, only the magic of compounding gets triggered. And the earlier you start, the better. Suggested read: The power of compounding Many youngsters who should start don't, because they are freshers. The first time you get a job and become financially independent, you have the liberty and freedom to spend however you want. And at this age, you'll have many desires but limited resources. The initial phase is crucial as you will have enough time to build sizable wealth. The first year of earning is the habit formation part. If you start with Rs 500 a month, the magic is not that it is a sizable amount. Instead, you'd have accumulated Rs 6,000 by the end of the year. And if it grows, you'd understand that the money has grown for free. You so far haven't gotten any money for free. This is where the magic happens; you convert a small sum into Rs 6,000 a year. So whether it is Rs 500 becoming Rs 6,000 a year or Rs 1,000 becoming Rs 12,000 a year, it doesn't matter. This has more to do with habit formation. Suggested read: Tiny habits for big results You all haven't experienced inflation in its true sense, but you might have heard stories. You'd have heard, "Back in our day, milk used to cost so little. And ghee used to be cheap." Well, that's inflation, because of which some of the big ticket things we want to do in our life have gone out of hand. For you to be really on top of things, you have to understand the impact of inflation on your wealth. You may leave it in a bank and feel it has grown a bit. Whereas, in reality, its value has actually gone down. It is actually a very dangerous thing. While compounding may be a wealth creator, inflation is the opposite, a wealth destroyer. And it can be devastating for some people. Just earning, saving and keeping it aside is not good enough. You need to invest in equity, and that too for the long run. Suggested read: The illusion of high returns What typically happens is whether you invest in stocks, or whether you invest in an equity mutual fund, the promise is that they will offer inflation-beating returns. The reason for this lies in the way a company functions. Whether any company provides any money, produces some goods or a service for a company to survive and more so thrive. It must be an economically viable activity. It must be able to do things because all the inputs to a company providing a service or manufacturing goods must be adjusted for inflation. Think of a Maruti car. In 1984, this company was launched, and it started producing cars. And this car used to cost Rs 45,000. But over a period of time, that same Maruti 800 has transformed into Maruti Alto. And now it costs around Rs 3.5 lakh rupees. The price has grown from Rs 45,000 to Rs 3.5 lakh rupees in 40 years. If you took the price of a Maruti car in 1984 and adjust it for inflation, the cost would still be a third of the present cost. Which means they are able to deliver you a superior product at a lower price, adjusted for inflation. As wages go up, input costs go up, and steel prices go up, a company needs to account for inflation when pricing its products. And for a business to be viable, it must be doing it in an economically viable way, which means that the prices must be inflation-adjusted. Suggested read: Equity without fear If the business is able to make profits in line with the coming rates of inflation, you, as an owner, will be able to benefit from inflation-beating returns. That is the only promise. And so, equity is necessary if you want to beat inflation. However, the problem is that equity happens to be a volatile asset, simply because there are a lot of factors which cause price movements in the stock market. In the short run, the only way you can protect yourself i

This article was originally published on November 15, 2024.