Mutual funds are well-diversified investment instruments that offer the flexibility of investing small amounts at regular intervals to earn great returns. They also offer investors the opportunity to gain exposure to a variety of assets and markets, which can be difficult for individual investors to do on their own. This puts them on the list of top investment options today and is also why they are popular among new and old investors. Mutual funds are preferred as investment instruments because of their profitability potential as a market-linked financial tool. The fund’s net asset value determines the value of an individual investor’s holding in the mutual fund.
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You can enjoy the true potential of a mutual fund when you make the right investment at the right time. But all investors are different and so are their needs. Thus, the ideal mutual fund investment amount varies from person to person, and there is no magic formula to determine it. However, you can ascertain the ideal amount to invest in mutual funds using a few simple guidelines.
This article will help to understand what proportion of salary can be dedicated to mutual fund investments.
Determine your goals
We all have financial goals we wish to save for. It could be buying the latest gadget, funding a vacation, saving for retirement, saving for children’s education, and other such requirements. Once you know what your goal is and when you want to achieve it, it is easier to understand how much money needs to be invested. Write down your goals and categorise them as short, mid or long-term goals. You may have a multitude of goals, but you may only be able to accomplish some of them with your income. Thus, prioritise and filter them. Once you have your final list, you can allocate your funds to mutual funds based on your goals.
50:30:20 rule
Experts suggest that the 50:30:20 rule is ideal for all financial plans. According to the rule, 50% of a person’s income should be reserved for their needs, 30% for wants and 20% towards an emergency fund. “Needs” refer to expenses that cannot be avoided. They are essential for everyday life and include rent, EMIs, utilities, groceries, medical expenses etc. “Wants” refer to expenses one can live without but indulge in to improve the quality of life or fulfil desires. Some examples of wants can be jewellery, makeup, subscriptions to entertainment media, etc. Since desires can be endless, it is wise for everyone to put a tab on their expenditure in the wants category to maintain their financial health.
Financial experts advise maintaining an emergency fund at least three times the monthly salary. This helps to cover any emergency like a disability, job loss, a medical condition that may cause them to be away from work, or anything else. The 20% in the 50:30:20 rule needs to go to this fund, and once three times the income is collected in this fund, you can begin investing. Thus, 20% of the salary can be dedicated to mutual funds. This amount can be increased if the expenditure on wants goes down.
It’s also important to remember that the earlier you start investing, the more time your money will have to grow. So, even if you can only afford to save a small amount of money each month, it’s still better to start investing now than to wait until you have more money saved up.
Calculating the amount to be invested using FOIR: FOIR stands for Fixed Obligations to Income Ratio, which can help ascertain the amount to be invested monthly into SIPs.
Below is the formula for FOIR
FOIR
[total expenses/ total income] *100
For instance, if you earn Rs. 1,00,000 monthly and your fixed expenses are Rs. 40,000, then FOIR is 40% i.e. 40,000. Thus, the available income for investment is Rs. 1,00,000 – 40,000, i.e. Rs. 60,000. Thus, you can invest any amount up to Rs. 60000 after spending on your wants.
Bottom line
Long-term investments in mutual funds can help retain the value of investments, and thus they are useful tools for financial planning. Investing a small amount in mutual funds periodically can also help you earn a significant sum later. This is because of the power of compounding that helps to grow the money. However, the amount you invest in mutual funds will depend on your financial goals, income, and needs. Reducing wants and prioritising your goals can help you allocate more to mutual funds and reach your financial goals faster. An age-old advice is to save first and spend what is left. It is also best to prepare your emergency corpus before considering any investments.
Disclaimer: This blog has been issued on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this document is for general purposes only and not a complete disclosure of every material fact. The information/data herein alone is not sufficient and shouldn’t be used for the development or implementation of an investment strategy. It should not be construed as investment advice to any party. All opinions, figures, estimates and data included in this blog are as on date. The blog does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on our current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Readers shall be fully responsible/liable for any decision taken on the basis of this article.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
