Why it is difficult to become wealthy investing in mutual funds

People often ask the question, “Can mutual funds make you a millionaire?” Mutual funds do not give you a strong probability of becoming a millionaire, particularly when compared with ETFs, also known as exchange traded funds.

The major problem with mutual funds is that they carry a very high management expense ratio, often referred to as an MER. Although you can generate decent returns from many mutual funds, your probability of becoming a millionaire from them is diminished by this expense ratio.

Another reason mutual funds will not make you a millionaire is that they do not tend to generate high returns when compared to other asset classes like stocks and options. Because mutual funds tend to be professionally managed and are low risk, their upside tends to be lower because there is often less of a return for low-risk investments, which is known as the risk/return trade off.

Those who ask if mutual funds will make you a millionaire will also be disappointed to know that is unlikely because these financial instruments tend to be highly diversified. It is difficult to become a millionaire from such diversified investments because there will inevitably be winners and losers in your portfolio, which will moderate your portfolio’s returns.

Unless you are extremely close to becoming a millionaire, it seems very unlikely that such an investment will generate sufficient returns to make you a millionaire.

This point is validated by the Fiscal Times. Moreover, in 2012 mutual fund returns lagged the market. As a result, unless you had over $900,000 invested in a particular mutual fund, using a mutual fund to become a millionaire seems even more unlikely.

While it is understandable that some argue that over time, mutual funds can make you a millionaire if you consistently hold and reinvest your dividends back into the mutual fund. However, many other investments, such as investing in high quality blue chip equities, bonds or treasury bills will give you a similar result.

It is very important to be mindful when analyzing your investment alternatives and making sound financial decisions. When assessing these alternatives, you will probably find that there are ETFs on the market that will give you nearly identical market exposure as a mutual fund but with a lower management expense ratio. This should be considered when you make an investment decision. 

As has been mentioned, there is no doubt that you can earn some return from investing in mutual funds. However, it is not necessarily the best investment vehicle for someone who is looking to become rich or a millionaire. Hopefully, the information in this article presents you with some advice as to why an ETF is often a superior investment to a mutual fund.