Investing in mutual funds is a smart technique to wealth-generation. Investing small sums regularly is a good habit. But, how much one should save from one’s salary is a difficult question. There are so many books that recommend saving at least 30-40 percent of one’s salary in a fixed deposit. But there is no clear answer on what percentage should be saved with mutual funds.
In this simple guide, let us understand how much one should save or invest every month for a mutual fund. We will understand some strategies that will help generate a bigger wealth corpus.
Before diving into mutual fund investments, it's important to understand your current financial situation.
Start by calculating your total income. You can try including all the sources that you are getting your money from. These could be salary, bonuses, rent from your house, and others. Next, you need to outline your monthly expenses. This could include regular costs such as rent, mortgage, utilities, or any existing debts.
For instance, imagine you earn ₹50,000 per month, and your fixed costs and expenses total ₹30,000. This leaves you with ₹20,000 as the amount that can be used for saving. Knowing this surplus is a foundational step. You can now plan on investing a part of this or the whole towards a mutual fund scheme.
Investment Goals
Clearly defining your investment goals is pivotal. Whether it's saving for a down payment on a house, funding your child's education, or building a retirement nest egg, understanding your objectives guides your investment strategy.
Determine the timeframe for each goal—short-term, medium-term, or long-term. Short-term goals, like a vacation in a year, may require a more conservative approach, while long-term goals, such as retirement in 30 years, allow for a more aggressive strategy with higher potential returns.
For example, if your goal is to accumulate a down payment for a home in five years, consider a balanced approach with a mix of equity and debt funds. On the other hand, if retirement is your long-term goal, you might lean more towards equity funds for their growth potential.
Risk Tolerance: A Balancing Act
Once you have identified how much you can save every month to meet your goals, the next step is to find out your risk level. Understanding your risk tolerance is very important because different funds can have different levels of risks. It's important therefore to choose a mutual fund scheme that is less risky than your comfort level.
Consider Mary, who, with a low-risk tolerance, invested heavily in aggressive growth funds, only to panic during market downturns. This example emphasises the need for a balanced approach that considers both potential returns and individual risk tolerance.
Although mutual fund operators clearly explain risks such as market risk, credit risk, and liquidity risk, not every investor understands them. Common mistakes include underestimating risk tolerance, leading to anxiety during market fluctuations, or overestimating it, potentially exposing investors to more risk than they can handle. Evaluating risk tolerance involves assessing your ability to endure potential losses without abandoning your investment strategy.
Financial Dependents
Your ability to invest in mutual funds is directly affected by how many people rely on you financially. Financial dependents include children, non-earning spouses, and aging parents who may require medical, educational, or living expenses. The more dependents you have, the more carefully you need to plan your investments. You may need to allocate more of your income toward recurring obligations, insurance, or short-term liquidity needs.
A person earns ₹80,000 a month and supports his wife, two school-going children, and his elderly mother. After household and medical expenses, he’s left with ₹10,000. Instead of putting it all in high-risk equity funds, he invests ₹6,000 in a balanced hybrid fund and ₹4,000 in a liquid fund to ensure safety and accessibility. His strategy allows steady wealth-building without compromising on family responsibilities. This cautious yet structured approach suits his dependent-heavy financial landscape.
Life Stage
Your stage in life plays a significant role in deciding how much to invest in mutual funds and where to allocate it. Younger individuals can take greater risks with a longer time horizon, while older individuals may prioritize safety and income. Life events such as marriage, childbirth, or nearing retirement affect your financial goals and risk appetite.
Anika, a 25-year-old with no dependents, allocates 30% of her salary to equity mutual funds, aiming for long-term capital growth. She chooses small-cap and flexi-cap funds with high growth potential. In contrast, Sudhir, a 58-year-old nearing retirement, is more focused on capital preservation. He invests 70% of his mutual fund portfolio in short-duration debt funds and conservative hybrid funds. These choices reflect his need for lower risk and more stable returns. Your investment mix should evolve as your responsibilities and time horizons shift.
Optimising Your Allocation Strategy
Once you've assessed your financial landscape, determined your risk tolerance, and set clear investment goals, the next step is optimising your allocation strategy. What percentage of your income should go into mutual funds?
A widely accepted guideline is the 50/30/20 rule. Allocate 50% of your income to necessities, 30% to discretionary spending, and reserve 20% for savings and investments. Within this 20%, your mutual fund allocation can be further optimised based on your risk tolerance and investment goals.
Let's say your disposable income is ₹2,000 per month. Following the 50/30/20 rule, allocate ₹1,000 to necessities, ₹600 to discretionary spending, and reserve ₹400 for savings and investments. Out of this ₹400, you might decide to allocate 70% to mutual funds, amounting to ₹280 monthly.
However, these percentages are not rigid and should be adapted to individual circumstances. Factors like emergency funds, existing investments, and additional savings goals also influence the optimal mutual fund allocation.
Monitoring and Adjusting Your Portfolio
Investing in mutual funds is not a one-time activity—it requires regular monitoring and thoughtful adjustments. As your income, expenses, and financial goals evolve, so should your investment strategy. You should review your portfolio at least once or twice a year to ensure it aligns with your risk profile and life stage.
For instance, a sudden salary increase could allow you to boost your SIP contributions or diversify into higher-return funds. If you anticipate large expenses or job instability, you might want to shift toward more liquid or conservative funds. Rebalancing your portfolio also helps manage risk by restoring your target asset allocation. Leverage tools like portfolio trackers or seek advice from a financial planner to guide your decisions.
Why invest in mutual funds?
Mutual funds are one of the most efficient and accessible investment tools for both new and experienced investors. They offer diversification by pooling money from various investors and investing across different sectors, asset classes, and instruments. This helps mitigate risk while providing the potential for good returns over time. Managed by professional fund managers, mutual funds take the burden of market research and execution off individual investors.
They are also highly flexible—you can start with as little as ₹500 through SIPs and scale as your financial capacity increases. Different types of funds cater to various goals, such as equity funds for long-term wealth, debt funds for stability, and hybrid funds for a balanced approach. Mutual funds also offer liquidity and transparency, with regular disclosures and easy redemption. For tax-saving purposes, ELSS funds are an added advantage. These benefits make mutual funds an essential component of a modern financial portfolio.
While determining the percentage of your income for mutual funds, beware of common pitfalls:
Overlooking Emergency Funds: Allocate a portion of your savings to an emergency fund to cover unexpected expenses. Avoid the temptation to invest all available funds, ensuring financial stability during unforeseen circumstances.
Ignoring Diversification: Diversify your mutual fund investments across different sectors and asset classes. This mitigates risk and enhances the potential for stable, long-term returns.
Chasing Performance: Avoid chasing past performance. Historical returns do not guarantee future results. Instead, focus on the fund's strategy, management, and alignment with your investment goals.
Neglecting Goal-Based Planning: Without clear goals, it’s hard to measure progress or stay motivated.
Skipping Portfolio Reviews: Failing to reassess leads to misaligned investments and missed opportunities.
Overconfidence in Market Timing: Attempting to time entry and exit points often leads to losses.
Ignoring Exit Loads and Expense Ratios: High costs eat into returns over time.
Inadequate Risk Assessment: Investing in funds beyond your comfort level leads to panic during volatility.
Investing Without Understanding the Product: Blind investments result in poor decisions and regret later.
Copying Others: Just because a strategy works for someone else doesn’t mean it suits your goal
While personal finance experts generally recommend allocating 25-35 percent of your investments to mutual funds, the exact allocation cannot be done using a one-size-fits-all approach. Understanding how much and in what level one should regularly invest in mutual funds, requires a thoughtful and personalised approach. The process itself considers factors such as financial background, risk tolerance, and investment goals. Good investors try to strike a balance between risk and return and align their goals with their strategy. They also regularly monitor and adjust their portfolio for financial success.
Remember Oscar Wilde's famous saying, everything in moderation including moderation in itself? Well, that may sound philosophical but it holds true even for mutual fund investments. It is great to have a balanced allocation, but then you should periodically review the allocation. And, prepare yourself with changing circumstances, and seeking professional financial advice. Doing so will not only help you with valuable insights but also enable you to grow your wealth. After all, diligence and prudence are such great traits that they help you navigate the world of mutual funds with ease.
This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their own research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.
Investments in securities market are subject to market risks, read all the related documents carefully before investing. Brokerage will not exceed SEBI prescribed limit. The securities are quoted as an example and not as a recommendation. SEBI Registration No-INZ000200137 Member Id NSE-08081; BSE-673; MSE-1024, MCX-56285, NCDEX-1262.
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