How do mutual funds work and what is their expected return?
How Do Mutual Funds Work? Imagine you and a group of friends contributing money to buy a variety of snacks. Your friend, the fund manager, decides which snacks to purchase based on everyone's preferences. Similarly, in a mutual fund, investors' money is used to buy a mix of financial instruments, creating a diverse investment portfolio. The Power of Compounding: Making Money Work for You Now, let's talk about the real magic – compounding. The returns earned on your mutual fund investments are reinvested, creating a snowball effect. Over time, this compounding can significantly boost your wealth. Expected Returns: Setting Realistic Goals Mutual fund returns are not fixed and can vary based on market conditions. It's crucial to set realistic expectations. The average annual return for equity mutual funds is around 10-15%, while debt funds typically offer lower returns, ranging from 6-10%. Calculation Example: Understanding the Math Let's break it down with a simp...