How much of your salary should you invest 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 of money to invest in mutual funds. And so, Systematic Investment Plans (SIPs) were introduced.

You can start investing in mutual funds with as little as Rs 100 or Rs. 500 . However, even though the bar to entry is low, each investor may need a different SIP amount for their goals. So, while Rs 500 may be sufficient for some investors, others may require larger investments.

In this article, we will discuss how much of your salary you can invest in a mutual fund to potentially optimise your investments.

• Table of contents

1. What is the 50:30:20 rule?
2. Mutual funds importance and benefits
3. Determine how much to invest in mutual funds
4. Build your portfolio

What is the 50:30:20 rule?

A good thumb rule for planning your investments 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 investment capacity. For example, if you earn Rs. 80,000 each month, then Rs. 40,000 will go into the needs category, Rs. 24,000 into wants, and the rest (Rs. 16,000) into savings.

The needs:

Roughly 50% of your monthly income may go into necessary expenses – things you have to buy or pay for every month, such as rent, loan EMIs, groceries, bills, 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 are not essential but can enhance your quality of life, such as dining out, shopping, etc. It can also include expenses such as gym memberships, yoga classes, subscriptions to streaming services, salon expenses, etc.

The savings:

Then comes the remaining 20% of your income. This you should set aside every month without fail. You need not put it all in mutual funds, though you can consider it if that suits your portfolio. You can also use a small portion of this amount for an emergency fund – an accessible and liquid cash reserve that you can use for unforeseen expenses.

Mutual funds importance and benefits

Traditional savings avenues offer stability and reliability, but many of them are not liquid and do not offer inflation-beating returns or the potential for significant capital appreciation. This is where mutual funds come in.

Mutual funds allow investors to tap into the growth potential of the financial market while mitigating risks. Investing in mutual funds can be a convenient way to build wealth over time by putting your money in a diversified portfolio of securities that is created and managed by financial experts.

Mutual funds invest in equities, fixed-income instruments, and other assets. Equities offer the potential to build wealth over time. Debt securities are relatively stable, with modest return potential.

Moreover, systematic investment plans (SIPs) in mutual funds make investing affordable and convenient. In SIPs, a fixed amount is invested at regular intervals.

Determine how much to invest in mutual funds

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 start with Rs. 500 or Rs. 1,000, it is recommended that you consult with your financial advisor to assess how much you can invest based on your goals and disposable income. Additionally, you must consider investing more 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 choose quarterly SIP instalments .

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.

If you are a new investor and do not want to take high risk, you can consider starting with small amounts and relatively stable options like debt funds.

As you become more comfortable with investing, you can consider diversifying your portfolio with equity funds, which offer higher return potential. However, they entail higher risk, so are better suited for long investment horizons that allow time to ride out short-term fluctuations and volatilities.

Conclusion:

How much of your salary you should invest in mutual funds depends on various factors. You should consider saving or investing at least 20% of your income each month. The sooner you start, the better. Talk to your financial advisor to find out suitable investment avenues and mutual fund schemes to build a robust 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 to potentially capitalise 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.