Investing In Mutual Funds: How much salary to invest in mutual funds

Financial freedom is the current talk of the town and a basic necessity in the current world. Investing for a better future remains the top priority of salaried professionals these days. Investing in the mutual funds is the most easy and convenient type of investment, with a lower risk than direct investment in stocks. But how much should you invest from your salary in mutual funds? Explained here

Financial freedom is the current talk of the town and a basic necessity in the current world. Investing for a better future remains the top priority of salaried professionals these days. Investing in the mutual funds is the most easy and convenient type of investment, with a lower risk than direct investment in stocks. But how much should you invest from your salary in mutual funds? Explained here

Invest 20% of Your Salary in Mutual Funds

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Financial experts recommend following the 50-30-20 rule when allocating your monthly income. This rule suggests:

– Spend 50% on needs like rent, bills, groceries
– Spend 30% on wants like dining out, entertainment
– Invest 20% in mutual funds and other savings

So if you earn Rs. 50,000 per month, you should aim to invest Rs. 10,000 (20%) in mutual funds. This amount can be increased if you cut down on discretionary spending.

Determine Your Goals

Before investing, identify your short-term, mid-term and long-term financial goals. This will help determine the type of mutual funds to invest in and the amount needed to achieve your goals.

Use the FOIR Ratio

The Fixed Obligations to Income Ratio (FOIR) can help calculate the amount available to invest. If your monthly income is Rs. 50,000 and fixed expenses are Rs. 20,000, your FOIR is 40%. The remaining 60% (Rs. 30,000) is available for investing in mutual funds and other savings.

Invest Regularly via SIPs

Invest in mutual funds through Systematic Investment Plans (SIPs) to benefit from rupee cost averaging and compounding. SIPs allow you to invest small amounts regularly, making it easier to allocate 20% of your salary.

Increase Investments Over Time

Increase your mutual fund investments with each salary hike. This will help you achieve your financial goals faster. Reduce discretionary spending to allocate more towards investments.

By investing 20% of your salary in mutual funds consistently, you can create significant wealth over the long term. Align your investments with your goals and risk profile for optimal results.

Different types of mutual funds that one can invest in 

  1. Equity Funds: These funds primarily invest in stocks or equities, offering growth potential over the long term but come with higher risk due to stock market volatility.
  2. Debt Funds: Debt funds invest in fixed-income securities like government bonds and corporate bonds, providing stable returns through interest payments and are considered less risky compared to equity funds.
  3. Hybrid Funds: Also known as balanced funds, these invest in a mix of equities and fixed-income securities to balance risk and return by diversifying across asset classes.
  4. Money Market Funds: Money market funds invest in short-term, low-risk securities like treasury bills and commercial paper, aiming for capital preservation and liquidity, making them ideal for investors seeking safety and stability.
  5. Index Funds: These funds replicate the performance of a specific index like the S&P 500 or DJIA, offering cost-effective investment options with potentially better performance compared to actively managed funds.
  6. Sectoral or Thematic Funds: These funds focus on specific industries or themes, allowing investors to capitalize on sector-specific opportunities.
  7. Tax-Saving Funds (ELSS): Equity Linked Savings Schemes (ELSS) offer tax benefits under Section 80C of the Income Tax Act while providing growth potential through equity investments.
  8. Liquid Funds: Liquid funds invest in short-term, highly liquid instruments, offering stability and easy access to funds for investors.
  9. Gilt Funds: Gilt funds invest in government securities, providing safety and stability with lower credit risk.
  10. International Funds: These funds invest in international markets, offering exposure to global opportunities and diversification.
  11. Growth Funds: Growth funds aim for capital appreciation by investing in growth-oriented equities with higher potential returns but also higher risk.
  12. Income Funds: Income funds focus on generating regular income through investments in fixed-income securities like bonds.
  13. Aggressive Growth Funds: These funds pursue higher returns by investing in more volatile assets or growth-oriented equities.
  14. Capital Protection Funds: Capital protection funds aim to protect the invested capital while providing modest returns through a mix of equity and debt investments.
  15. Fixed Maturity Funds: These funds have a fixed maturity period and invest in specific securities, offering a defined investment horizon.
  16. Pension Funds: Pension funds are designed for retirement planning, offering long-term growth potential with a lock-in period.

These diverse types of mutual funds cater to varying risk appetites, investment objectives, and time horizons, allowing investors to select schemes that align with their financial goals and preferences.

 

Read More: Investing in mutual funds: Types, plans, benefits and key goals of various mutual funds