How Much of Your Salary Should You Invest in Mutual Funds? | North Loop Official Blog
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21 Oct 2020

How Much of Your Salary Should You Invest in Mutual Funds?

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Mutual funds have become one of the most popular investment options these days as they offer the opportunity of investing small amounts frequently. However, many investors remain confused about the amount a salaried individual should ideally invest per month. In this article, we shall focus on some of the factors that determine the amount you can allocate from your salary to investing in mutual funds.

How much to invest in mutual funds as per experts?

According to most experts, the general rule is that if your ability to invest covers 40% of your income, then around 20% of it should go towards investments. However, if you are wondering how much to invest in mutual fund SIP, calculating an exact amount can get tricky as you may or may not get to change the specified rate later due to an alteration in priorities. Therefore, before fixing a particular value, it is crucial to keep in mind a couple of factors.

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Expert’s 50:30:20 rule -

According to professionals, every individual should mandatorily implement the rule of 50:30:20 in their financial plan. That means around 50% of the income should get spent on needs, 30% on wants and the remaining 20% should get utilised to build an emergency corpus. Since the former is necessary to sustain daily life and include basic amenities like groceries, house rent, utilities and wants include vacations, gym memberships, movie tickets etc., it gets easier to put a limit on spending for wants rather than that on needs.

Precautionary withholding of funds -

Building an emergency corpus from the remaining portions of your income is also very crucial and should ideally be at least thrice your monthly salary. Precautionary funds can prove to be extremely beneficial during times of emergency or crisis, and resources for this purpose can get kept in savings accounts or cash form. However, liquid funds are also a good option as they offer high liquidity with instant redemption facilities and can come handy during unprecedented emergencies. Such funds also provide a greater appreciation of the amount you deposit as compared to a savings account that offers lower returns.

How much to invest in mutual fund SIP?

Before setting aside a portion of monthly salary for SIP payments, experts suggest that it is essential to determine the fixed obligation to income ratio (FOIR). Doing so is of paramount importance because FOIR expenses include those that are necessary for meeting life’s basic requirements and therefore, need to get prioritised. One way to arrive at the FOIR value is by adding all the fixed expenses that you incur per month. That can include things like rent, electricity bills, money spent on food and utilities etc. Experts suggest that the amount available after deducting FOIR from your monthly income should ideally be the maximum value of your investments. That means, if for example, your monthly salary is Rs.50000 and the total expenses or FOIR is Rs.20000, you can decide upon any amount up to Rs.30000 for SIP investment. A lower FOIR usually represents the ability to opt for a relatively higher value of an investment in mutual funds and vice versa. Also, before investing in a SIP plan, you should consider a variety of factors like your financial goal, time horizon and choice of funds. Moreover, the total amount of SIP investment should get decided only after careful assessment and analysis of your income and expectations from the stock market.

Importance of investing in mutual funds -

Along with thinking about how much to invest in mutual funds, it is necessary to know the importance of mutual fund investing so that you can plan your investments better. So what makes mutual funds so popular?

Inflating-beating returns - It is primarily the fact that they are one of the few investment vehicles that have the potential to offer inflation-beating returns.

Diversification - Mutual funds also offer a significant opportunity for diversification across different investment options and regions. You can invest in mutual fund India from US and diversify your portfolio effortlessly. That can help you mitigate the impact of volatility in your country’s market and also aid in geographical diversification. You can invest in mutual fund India from US through digital investment platforms like North Loop. It is easy and very user-friendly.

Long-term goals - Most specialists believe that the best utilisation of mutual funds happens when you stay invested for the long-term that is around five years or more. An extended period of investment mixed with the power of compounding can often provide excellent returns for those with a long-term investment horizon. It has gotten observed that in certain market situations and during long periods, mutual funds have the ability to offer returns ranging from 15% to 18%. That is because the power of compounding can enhance the corpus accumulated every year.

Conclusion -

Wealth creation is not merely about the amount of investment. It requires a lot of meticulous planning, strategising, persistence and consistency. However, one of the best and simplest pieces of advice for successful and accelerated capital formation is to start saving early on, incorporating small portions of monthly income towards investments and increasing it proportionally as the income increases.

If you want to start investing in mutual funds online, you can do so on North Loop. We offer a digital investing platform, 24*7 customer services, personalised fund recommendations based on your goals as well as the help of professional mutual fund advisors to make your investing journey a seamless one. You can also invest in mutual funds India from US via North Loop.

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This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended be advice. You must obtain professional advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax, investment or other professional advice from North Loop or its affiliates. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. All opinions expressed do not reflect the views of North Loop nor are endorsed by North Loop.