How much of your monthly income can you consider investing in mutual funds?
Mutual funds have been around for a long time, and they have gained traction over the years. If you look at the history of mutual funds, you will find out that they were meant for lumpsum investments when they were first introduced. But as mutual funds evolved, Asset Management Companies (AMCs) realised the need to include salaried individuals who did not usually have a large sum money to invest in mutual funds. And so, Systematic Investment Plans (SIPs) were introduced.
SIPs were launched way back in the 90s in India. Fast forward to present times and now you can start to invest in mutual funds with as little as Rs. 500 or Rs. 1,000. The entry bar is so low that you may think that a Rs. 2,000 investment every month (or a total of Rs. 24,000 per year) may be enough. But that is not the ideal way to make the most of your mutual fund investment.
In this article, we will discuss how much of your salary should you invest in a mutual fund and how to start investing in mutual funds.
- Table of contents
- Divide your income into 3 categories: needs, wants, savings
- Build your portfolio
- Decide an SIP amount
- FAQ
Divide your income into 3 categories: needs, wants, savings
If you are serious about living the good life, the rule of thumb is to divide your monthly income into three categories: needs, wants and savings. This is also known as the 50:30:20 rule. It helps you get a clear picture of your income, expenses, and savings. For example, if you earn Rs. 80,000 each month then Rs. 40,000 goes into the needs, Rs. 24,000 goes into the wants and the rest (Rs. 16,000) into savings.
The needs:50% of your monthly income goes into things you may have to buy, or pay for every month, such as rent or home loan instalment, buying groceries, making bill payments, etc. These are the things you absolutely must pay for to sustain your daily life.
The wants:The next 30% of your salary goes into things that you want to splurge on, experience or buy, such as dining out, shopping, etc. You can also include the things that you want to improve and enjoy your daily life such as a gym membership, yoga classes, subscription to streaming services, grooming at the salon, etc.
The savings: Then comes the remaining 20% of your income. Save it every single month without fail. You need not put it all in a mutual fund investment, even though you can consider it if that suits your portfolio. You can also start investing a small portion of these savings into an emergency fund. The important thing is to save at least 20% of your income every month.
Build your portfolio
Now that you know how much of your salary you must save each month, it is time to start building your investment portfolio.
You can consider starting small if you are a new investor with relatively stable options like debt funds. They have a shorter investment horizon and can help you gain confidence in mutual fund investments.
Next, it is time to diversify your portfolio with the more dynamic and rewarding equity funds. Flexi-cap funds can be a good fit and Bajaj Finserv AMC, too, has recently launched a Flexi Cap Fund.
If you are like most people, you may not have a lumpsum lying around in your account to invest in equity funds. If you do, then you can talk to your financial advisor to know your options when it comes to investing in equity funds.
Decide an SIP amount
If you do not have a lumpsum to invest in mutual funds , you can start a Systematic Investment Plan for equity funds. While most mutual funds let you get started with Rs. 500 or Rs. 1,000, we suggest you consult with your financial advisor and consider increasing the amount to Rs. 5,000 or Rs. 10,000 (or more) to see tangible results from your investment. You will be able to experience the power of compounding with higher amounts, especially if you invest for a longer period – 7 years, 10 years and so on. Additionally, you must consider investing more in mutual funds as your income grows.
However, it is not a problem if you think that you want to get started with a small amount. SIPs are flexible and you can increase (or decrease) the instalment in the future. If you are not sure that you can invest in mutual funds each month, you can set up the SIP instalment to quarterly frequency as well.
Conclusion:
How much of your salary should you invest in mutual funds depends on various factors. In general, you must consider saving at least 20% of your income each month and invest the whole amount or a part of it in mutual funds. The sooner you start, the better. Please talk to your financial advisor to find out suitable mutual fund schemes to build a solid investment portfolio.
FAQs:
What's a recommended percentage of income for mutual fund investments?
Financial experts often suggest allocating 10-20% of your monthly income to mutual funds, but it depends on individual goals and risk tolerance.
Should I invest more during a market downturn?
Some investors increase their allocation during market dips, aiming to capitalize on lower prices, but it depends on your risk appetite.
Can I invest all my disposable income in mutual funds?
It's crucial to maintain an emergency fund and cover essential expenses first; only invest what you can afford to risk. This is because mutual fund investments are subject to market risks.
How can I calculate my ideal investment amount? Consider using financial planning tools or consulting a financial advisor to determine an appropriate investment level.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.