Mutual funds have been one of the most buzzing investment options these days. Apart from the much-needed flexibility and liquidity, they allow you to gain inflation-beating returns on your investment. Additionally, you can choose to invest a fixed portion of your income every month through a Systematic Investment Plan (SIP) to fulfill your long-term financial goals.
However, one question that often confuses many investors is how much of their salary or income they should invest in mutual funds every month. Unfortunately, there is no “one size fits all” answer to this question. Since the needs and risk appetites of every investor are different, their SIP amount cannot be the same.
In this article, we will tell you about some methods that can help you determine what portion of your salary you should invest in mutual funds every month.
- Follow the 50:30:20 rule
All earning individuals should try to implement the 50:30:20 rule in their financial plan. By implementing this rule, you can ensure a pleasant present as well as a bright future for yourself and your loved ones.
As per the 50:30:20 rule, you can spend up to 50% of your salary on your needs, 30% on your desires, while you should save or invest the remaining 20% to build a corpus for the future.
So, as per this rule, you should invest around 20% of your salary in mutual funds. If you want to diversify your savings across multiple instruments, you can keep 5 to 10 percent of your income in fixed-return instruments – such as savings bank account, fixed deposits, etc. – and invest the remaining 10 to 15 percent in mutual funds.
- Consider the FOIR method
You can also consider your fixed obligations to income ratio (FOIR) while setting aside a portion of your salary for mutual fund SIPs. It will give you a fair idea of how much you need to spend in a month and how much you can save or invest.
Let’s demonstrate this with the help of an example. Suppose you have a monthly salary of Rs. 50,000, and your total monthly expenses – including house rent, utility bills, groceries, etc., – add up to Rs. 30,000 (which represents your FOIR).
Now, the total surplus that you can save or invest every month is Rs. (50,000 – 30,000), i.e., Rs. 20,000. You can also keep a portion of this surplus to meet your emergency expenses, say Rs. 5,000 to Rs. 10,000 every month, and invest the remaining in mutual funds through a SIP.
- Also, consider your long-term goals
You should also consider your long-term financial goals while deciding your SIP amount for mutual funds. You should determine your SIP amount as per the corpus you would like to accumulate for your long-term goal, your investment horizon, and your choice of funds.
For example, if you want to create a corpus of Rs. 50 lakhs in 15 years, you can invest Rs. 10,000 every month in a mutual fund offering 12% annualized returns. You need to manage your expenses and savings accordingly.
Conclusion
By investing even small portions of your salary in mutual funds, you can create significant wealth for your future. Rather than investing higher amounts, it’s important to invest persistently and in a disciplined manner. Download the Tata Capital Moneyfy App on your smartphone to make your investment journey a breeze.