How much salary to invest in Mutual Funds

Financial experts recommend dedicating 10-20% of monthly income to mutual funds, though this varies based on personal goals and risk tolerance.
How much salary to invest in Mutual Funds
3 mins read
12-July-2024

Financial experts suggest investing 10–20% of monthly income in mutual funds, as per the individual goals and risk tolerance. Some advocate saving at least 20% monthly, investing part or all toward mutual funds. Alternatively, the 50/30/20 rule allocates 50% to necessities, 30% to discretionary spending, and 20% to savings/investments, including mutual funds, customizable based on goals and risk tolerance.

Achieving financial independence relies heavily on meticulous financial strategising from an early age, encompassing a thorough assessment of expenditures, debts, and investment prospects. Navigating the maze of personal finance often leaves employees pondering over a constant challenge – figuring out what portion of their hard-earned salary should be invested into mutual funds.

For those drawing a regular paycheck, the puzzle persists: "How much do mutual funds make?" and "How much salary to invest in mutual funds?”

In this blog, we answer these and more frequently asked questions related to investing your salary in mutual funds, including how much money to set aside for investing in mutual funds and how to invest directly from your paycheck.

How to decide salary to invest in Mutual Funds?

To determine the portion of your salary to invest in mutual funds, consider factors like your financial goals, current expenses, debt obligations, emergency fund, and risk tolerance. Here are few Tips that can help you decide the amount of salary to invest in Mutual Funds with examples:

1. 50:30:20 rule

Typically, your income is divided into three primary aspects: expenditure, emergency fund, and long-term investments. The 50:30:20 rule takes into account these three aspects and is ought to be a requirement for every earning person's financial strategy. This is crucial, especially for those who support themselves. According to the 50:30:20 guideline, you should spend 50% of your money on needs, 30% on wants, and set aside 20% as an emergency fund.

Needs are those without which you cannot sustain your daily life. These are groceries, house rent or EMI, utilities, and so on. Needs are something you cannot compromise on, and you must spend money on them. Although they are not strictly necessary, wants are something you utilise to improve your quality of life. These include things like movie tickets, gym memberships, vacations, and subscriptions to streaming services. Everyone should try to spend as little money on wants as feasible.

You need to save the remaining 20% of your income, or at least three times your monthly pay, to accumulate an emergency corpus. After that's finished, you can begin investing. Therefore, your investments in mutual funds should be 20% of your monthly salary. If you can manage to cut back on spending on wants, the saved amount can be put towards increasing your mutual fund investment.

2. FOIR application

FOIR, or Fixed Obligations to Income Ratio, stands as a crucial benchmark in financial planning. Before earmarking any segment of one's monthly salary for Systematic Investment Plan contributions, establishing FOIR is imperative. These fixed obligations encompass indispensable expenses, safeguarding individuals' ability to fulfil their fundamental needs.

Let us demonstrate this with an example:

Aarav has a monthly income of Rs. 70,000. His expenses can be listed as follows:

Rent = Rs. 15,000

Utilities (Electricity, Water, Internet) = Rs. 8,000

Groceries and other essentials = Rs. 10,000

Total Expenses/FOIR = Rs. (15,000 + 8,000 + 10,000) = Rs. 33,000

This represents the total FOIR of Aarav.

Total income available for investments = Total income – FOIR = Rs. (70,000 - 33,000) = Rs. 37,000

Thus, Aarav can decide upon any amount up to Rs. 37,000 for the SIP investment scheme.

A lower FOIR would ideally indicate that investments in mutual funds can be increased and vice versa.

3. Precautionary withholdings of funds

People need to set aside a certain part of their leftover income for investments, which is determined by deducting FOIR from their monthly salary, to handle unforeseen expenses.

Precautionary Funds need to be maintained on hand for emergencies. Cash or savings accounts can be available as resources for this. It would be prudent, nevertheless, to have your emergency money invested in liquid assets. As their name would suggest, these funds have high liquidity, and most of them allow for quick redemption. When you need it, you can simply access your emergency money as a consequence against the return on a savings account, which is usually 2%. Furthermore, it provides an additional 6-7% appreciation on the deposited cash. Accommodations for this reason must be made before examining the SIP plans available for long-term investing.

4. Long-term goals

Investing in mutual funds is an excellent way to shape your financial future. The real benefits of mutual funds shine through when you commit to long-term investments, ideally holding onto them for five years or more. This strategy leverages the magic of compounding, where your earnings generate more earnings over time, leading to substantial returns in the future. Especially during bullish market conditions, mutual funds can yield impressive returns, often ranging between 15% to 18%.

To illustrate, consider the following situation:

Given:

  • Ananya starts investing Rs. 90,000 a year in mutual funds at the age of 28 years.
  • Arjun starts investing in the same mutual funds at the age of 38 years.
  • The mutual fund scheme offers an annual interest of 11%.
  • Both Ananya and Arjun decided to redeem their investment at the age of 58 years.

For Ananya:

  • Annual investment amount: Rs 90,000
  • Investment period: 30 years (from 28 to 58 years)
  • Interest rate: 11%

For Arjun:

  • Annual investment amount: Rs 90,000
  • Investment period: 20 years (from 38 to 58 years)
  • Interest rate: 11%

Using the compound interest formula:

A = P × (1 + r)^n

Where:

  • A is the amount accumulated
  • P is the principal amount (initial investment)
  • r is the annual interest rate (as a decimal)
  • n is the number of years the money is invested for

Let's calculate the amount accumulated by both Ananya and Arjun:

For Ananya:

A_Ananya = 90,000 × (1 + 0.11)^30

For Arjun:

A_Arjun = 90,000 × (1 + 0.11)^20

Let's compute these values:

For Ananya:

A_Ananya ≈ 90,000 × 68.432 = 61,58,880

For Arjun:

A_Arjun ≈ 90,000 × 12.882 = 11,59,380

So, the difference in the sum accumulated by Ananya and Arjun would be:

Difference = A_Ananya - A_Arjun

Difference = 61,58,880 - 11,59,380

Difference = 49,99,500

Therefore, Ananya accumulates approximately Rs. 49,99,500 more than Arjun by the time they redeem their investments at the age of 58 years.

Note: The power of compounding enhances the corpus accumulated every year. The numbers in the illustration above do not show the full calculations.

5. Optimising your allocation strategy

To optimise your mutual fund allocation strategy, consider your financial goals, risk tolerance, and investment horizon. Diversify your investments across various fund types, balancing between equity, debt, and hybrid funds to spread risk. Regularly review and adjust your portfolio to align with market trends and personal financial changes. Utilise automated tools for systematic investments and rebalancing. Establish a disciplined approach by adhering to a consistent investment schedule, such as a SIP. This strategic allocation ensures a balanced and growth-oriented portfolio, maximising returns while managing risks effectively over the long term.

6. Monitoring and adjusting your portfolio

Regularly monitoring and adjusting your mutual fund portfolio is crucial for maintaining its performance and aligning with your financial goals. Review your portfolio at least annually, assessing the performance of each fund against benchmarks and objectives. Rebalance your investments to maintain your desired asset allocation, considering market changes and personal financial circumstances. Stay informed about economic trends and fund management updates to make informed decisions. By actively managing your portfolio, you can optimise returns, mitigate risks, and ensure your investments remain aligned with your evolving financial goals and risk tolerance.

High-return mutual fund categories for smart investing

Equity Mutual Funds

Hybrid Mutual Funds

Debt Mutual Funds

Tax Saving Mutual Funds

NFO Mutual Funds

Multi Cap Mutual Funds


Have you ever wondered how much your mutual fund investments could grow over time? Discover potential returns with our mutual fund calculator. Estimate your investment's future value now!

Advantages of Salary SIP

Salary SIP is not just a financial strategy; it's a mindset shift towards a brighter financial future. It's about making investing a natural part of your life, just like paying bills or buying groceries. With salary SIP by your side, you're not just investing money; you're investing in your hopes, dreams, and aspirations, paving the way for a more secure and prosperous tomorrow.

One of the most comforting aspects of salary SIP is its reliability. It's like having a dependable partner who helps you stay disciplined with your finances. With each paycheck, you know that a predetermined amount is being invested, regardless of market fluctuations or economic uncertainties. This consistency not only builds a strong foundation for your financial future but also instils a sense of confidence and control over your money matters.

Moreover, salary SIP offers the flexibility to tailor your investments according to your unique financial goals and circumstances. Whether you're saving for retirement, planning for your child's education, or dreaming of owning your own home, you can adjust the investment amount and frequency to suit your needs. This personalised approach empowers you to take control of your financial destiny and work towards achieving your dreams, one paycheck at a time.

How does salary SIP work?

Every month, a portion of your income is automatically set aside and invested in mutual funds or other investment avenues. This simple yet powerful process ensures that you're consistently putting your money to work, even on hectic months when financial planning might slip your mind. By investing regularly over time, you're harnessing the power of compounding, where your returns generate additional returns, leading to accelerated growth of your investment portfolio. It works seamlessly, just like the direct deposit of your salary into your bank account.

To calculate SIPs easily, use our SIP calculator.

Things to avoid while determining the percentage of income for investing in mutual funds

When determining the percentage of income to invest in mutual funds, it's crucial to avoid several pitfalls. Firstly, refrain from investing without a clear understanding of your financial goals and risk tolerance. Investing too much can strain your finances, while too little may not meet your investment goals. Avoid neglecting an emergency fund; always ensure you have sufficient savings for unexpected expenses before investing. Steer clear of ignoring high-interest debt, as paying this off should generally take priority over investing. Additionally, avoid making decisions based on short-term market trends or pressure from others; a disciplined and informed approach aligned with your long-term objectives is essential. Finally, resist the temptation to invest without proper research or professional advice, as this can lead to suboptimal choices and financial losses.

Key points to remember

  1. Ensure you have a clear understanding of your financial objectives and how much risk you can handle before deciding on the investment percentage.
  2. Prioritise setting aside sufficient savings for unexpected expenses to avoid financial strain when investing.
  3. Focus on paying off any high-interest debts before committing a large portion of your income to mutual fund investments.
  4. Do not base investment decisions on short-term market trends or external pressures. Stick to a disciplined, long-term strategy.
  5. Always conduct thorough research and consider professional financial advice to make informed investment choices.

Conclusion

Financial planning from an early age can greatly assist you in reaching your goals and completing your retirement plans if done correctly. Investing is not so much a one-time event as it is about perseverance and consistency. Setting aside even a tiny amount of your monthly income will help you create money in the future. As your income rises, gradually raise the amount you put into investments to expedite the growth of wealth. When deciding how much to invest in mutual funds, do some strategic planning because it's highly advised to invest your pay wisely.

Including the 50:30:20 guideline in your financial plan is always recommended. It is recommended to put 20% of your income in mutual funds; this amount can subsequently be increased whenever feasible. With the ever-increasing effect of inflation, investors feel an innate need to look at options such as mutual funds to prevent their investment from losing its value over time.

Essential tools for mutual fund investors

Mutual Fund Calculator

Lumpsum Calculator

Mutual Funds SIP Calculator

Step Up SIP Calculator

SBI SIP Calculator

HDFC SIP Calculator

Nippon India SIP Calculator

ABSL SIP Calculator

Tata SIP Calculator

BOI SIP Calculator

Motilal Oswal Mutual Fund SIP Calculator

Kotak Bank SIP Calculator

Frequently asked questions

How much of salary to invest in SIP?

According to the 50/30/20 budgeting rule, you should allocate 20% of your monthly salary to savings and investments, which includes SIP (Systematic Investment Plan). For example, if your monthly salary is Rs 50,000, you should aim to invest Rs 10,000 in SIP each month. However, the specific amount you allocate to SIP within that 20% can vary based on your financial goals and priorities.

What if I SIP Rs. 30,000 per month for 5 years?

Future Value (FV) of SIP Calculation:

Monthly Investment Amount (P): Rs 30,000

Annual Interest Rate: 15-18%

Number of Months (n): 5 years x 12 months/year = 60 months

Monthly Interest Rate (r): Average Annual Interest Rate / 12

Assuming average annual return rate as 15%:

Monthly Interest Rate (r) = 0.15 / 12 = 0.0125

Assuming average annual return rate as 18%:

Monthly Interest Rate (r) = 0.18 / 12 = 0.015

FV = P * [(1 + r)^n - 1] / r

After obtaining the monthly interest rate for both 15% and 18%, you can plug in the values to calculate the future value (FV) of the SIP for both scenarios.

Disclaimer: The calculation provided above is for illustrative purposes only and should not be considered as financial advice. Actual returns may vary depending on market conditions, investment performance, and other factors. Additionally, past performance is not indicative of future results. It's important to conduct thorough research and consult with a qualified financial advisor before making any investment decisions.

What is the 50:30:20 rule?

The 50:30:20 rule is a crucial aspect in financial planning and investments, especially for those who support themselves. According to the 50:30:20 guideline, you should spend 50% of your money on needs, 30% on wants, and set aside 20% as an emergency fund.

How much is Rs. 4,000 per month in SIP for 10 years?

To calculate the future value of an SIP (Systematic Investment Plan) of Rs 4,000 per month over a period of 10 years, we'll use the formula for future value of an annuity:

FV = P * [(1 + r)^n - 1] / r

Where:

FV = Future Value

P = Monthly Investment Amount (Rs 4,000)

r = Monthly Interest Rate (annual interest rate divided by 12)

n = Number of Months (10 years x 12 months/year = 120 months)

So,

Monthly Investment Amount (P): Rs 4,000

Annual Interest Rate: 10%

Number of Months (n): 10 years x 12 months/year = 120 months

Monthly Interest Rate (r): Annual Interest Rate / 12 = 0.10 / 12 = 0.008333

FV = 4000 * [(1 + 0.008333)^120 - 1] / 0.008333

After calculation, the future value (FV) of the SIP after 10 years is approximately Rs. 8,26,208. Therefore, investing Rs 4,000 per month in an SIP for 10 years at an average annual return rate of 10% would yield approximately Rs. 8,26,208.

Note: The calculation provided above is for illustrative purposes only and should not be considered as financial advice. Actual returns may vary depending on market conditions, investment performance, and other factors. Additionally, past performance is not indicative of future results. It's important to conduct thorough research and consult with a qualified financial advisor before making any investment decisions.

How much salary should I save and invest?

A general guideline is to save and invest at least 20% of your salary. This rule, known as the 50/30/20 rule, suggests allocating 50% of your income to needs, 30% to wants, and 20% to savings and investments. Adjust based on your financial goals and obligations.

Can a salaried person invest in mutual funds?

Yes, a salaried person can invest in mutual funds. Mutual funds are accessible to individuals of all income levels and offer various schemes to suit different financial goals and risk appetites. Regular investments through Systematic Investment Plans (SIPs) are particularly popular among salaried individuals.

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Disclaimer

Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.