How Do You Make Money from Mutual Funds?
How exactly do mutual funds make money? Investments in mutual funds have increased drastically in the recent years. They gained popularity harpoons from the fact that these diversified portfolio investment vehicles have delivered consistent returns. Mutual Funds market is well regulated and people are realizing its potential. This is the reason for the Mutual fund market growing strongly at 15%. Also, it is believed to be worth Rs. 130 million by 2025. So, can you make money from mutual funds? More importantly, how can you earn money from mutual funds?
Let’s just deep dive into how mutual funds makes us money.
Mutual funds are structured assets of either equity or debt. Thus the underlying asset is either our stocks or shares and bonds or any debt instrument. Mutual funds are of various types and the decision of which type of investments we need to invest is solely our discretion.
Hence, any appreciation in the underlying asset’s price results in the capital appreciation or in simpler terms the return.
There are three such ways of making money from mutual funds:
- Underlying security Income earned from dividends on stocks and interest on bonds. The mutual fund pays out nearly all of the net income it receives over the year (in the form of a distribution).
- An increase in the price of underlying securities (called capital gain). Most mutual funds also pass these gains on to their investors.
- The fund share price or NAV increases. This happens if fund holdings increase in price. The profit is differential NAV, the one at which we had invested in the fund and at one we wish to sell
The Mutual fund power
The mutual fund derives its strength of high returns for the investments we have made from the following pillars
a). The compounding power:In simple words compounding means that our investment amount is reinvested along with the return or interest in the previous period. For example, if the interest rate is 20% and our initial capital is Rs. 100.
Then, after a span of one year, our net capital becomes Rs. 120.
This Rs. 120 is reinvested to get another 20% return on it in the upcoming period and hence the amount of our capital becomes Rs. 144. Similarly, the amount becomes Rs 172.8, in the third year and so on it continues to grow.
b). Expertise from the Fund Manager:We often find investing in stock markets and other financial markets difficult due to the limited source of time or may be due to our limited knowledge. But, in Mutual Fund the entire portfolio is managed by the experts itself in order to get better returns. This process is called active portfolio management, where each investment is adjusted and tuned as per the current prevailing market conditions to generate good returns.
Mutual Fund can save money
Mutual fund disciplines the expenses of an individual. This beautiful instrument is called SIP or Systematic Investment Plan. SIPs are deducted from the account directly hence it forces us towards conservative expense nature.
We saw how you can be making money from mutual funds. Let’s look at how online SIP calculators work.
Inputs: The calculator basically takes 4 types of input
- a) SIP amount
- b) Should SIP me monthly or quarterly
- c) Tenure of SIP
- d) Type of fund: Equity/debt/hybrid
Taking these inputs the calculator calculates the amount we have invested and the maturity amount. This return is the result of compounding on the tenure we wished to invest for. The entire thing is graphically shown with asset wise return bifurcations.
The most important thing about a calculator is that we can simulate SIP amount tenure and other parameters and just visualize how long or short we can attain our desired amount.
Do mutual funds make money? How to earn money from mutual funds? How does SIP work? We have answered these questions for you. It is now your turn to start investing!