Can Mutual Funds Deliver Multibagger Returns?

Most investors aim to find a stock that can deliver multibagger returns over their lifetime. But, at the same time, the stock market is a place where they may be risks and rewards in equal proportion. Stocks are known for delivering exceptional returns, but at the same time, they require a certain amount of knowledge, research, and a little luck most of the time. Mutual funds, on the other hand, are less diversified, safer investments for generating wealth over time. In this article, we will see if mutual funds can produce multibagger returns and how they are different from individual stocks.

A multibagger stock is one that gives returns of more than 100%. The term, coined in 1988 by Peter Lynch, originated from the baseball terminology, where every base has a "bag." Hence, a multibagger investment is one that can multiply the original investment several times over.

• Mutual funds allow diversification, which helps minimise risk and increase the likelihood of stable long-term returns.
• Mutual funds are not going to give you any dramatic multibagger returns, but they are much safer and more predictable for creating wealth in the long term.
• The power of compounding in mutual funds helps grow your wealth.
• You should compare mutual funds and choose an option that is suitable as per your goals and risk appetite.

Individual stocks can be a multibagger, but mutual funds cannot be. Essentially, it is an investment vehicle wherein money from a large number of investors is collected and put into a diversified portfolio of stocks, bonds, or other assets to reduce risk and generate steady returns over time.

The key difference is that mutual funds are constructed to average out returns. So, the return from one stock in the portfolio is balanced against returns from more mediocre stocks. This makes it less likely for a mutual fund to deliver multibagger returns, though certainly not impossible. Over the long term, some mutual funds have been able to give remarkable returns, at times doubling or even tripling in value.

Mutual funds are professionally managed funds. Professional fund managers analyse market trends and decide on the investments on behalf of the investors. Therefore, this strategy of mutual fund schemes reduces the risk of market fluctuations while investing in individual stocks.

• Diversification: Mutual funds invest in a wide range of stocks, which also helps spread the risk.One stock can go wrong but risk is distributed as other stocks in the portfolio will protect the loss because they have performed well.
• Professional management: The expertise and resources of fund managers help them identify trends in the market; hence, they are helpful in making the right investment decisions.

Compounding is an extremely powerful concept when it comes to investing in mutual funds. After reinvestment of the returns accrued from mutual fund investments, there are further returns. Over time, this compounding effect increases your investment value even if it does not offer dramatic returns of a multibagger stock.

Even though mutual funds are managed by experts, there are still common mistakes that investors should avoid:

• Loss aversion: Holding on to investments in the hope of their eventual recovery leads to unnecessary losses. It is important to know when a fund is underperforming and to rebalance your portfolio under such circumstances.
• Waiting for old highs: You as an investor must not wait for an investment to reach a past high.
• Recency bias: Be wary of making investment decisions based on recent performance. Look at long-term trends and the track record.

You will not always get multibagger returns like in some individual stocks, but mutual funds give you a diversified portfolio, and a professionally managed way to grow your wealth. Moreover, if you are an investor who does not have enough time or expertise to keep track of the stock market, then mutual funds serve as a trusted investment option, giving you good returns in the long term.

The Bajaj Finserv Mutual Fund Platform provides robust tools like a mutual fund calculator, which helps you compare and choose from over 1,000 mutual fund schemes on the platform.