A popular and effective budgeting method is the 50/30/20 rule, which helps individuals manage their income efficiently. According to this approach, 50% of your earnings should be allocated towards essential needs such as rent, EMIs, groceries, and utilities. The next 30% can be reserved for lifestyle and discretionary expenses, including dining out, entertainment, and travel. The remaining 20% is recommended for savings and investments, such as mutual funds or fixed deposits, to build long-term wealth and financial security. This rule promotes a balanced financial plan, ensuring that you meet daily needs while also securing your future.
In this article, we will understand how to determine the ideal investment amount for mutual funds. We will also explore concepts like the 50:30:20 rule. Investors can gain clarity on how much they should invest in mutual funds to align with their financial objectives.
What are mutual funds and ways to invest in them?
Mutual funds pool money from various investors to invest in a diversified portfolio of stocks, bonds, or other securities. One common way to invest in mutual funds is through Systematic Investment Plans (SIPs). SIPs allow investors to invest a fixed amount at regular intervals, typically monthly, fortnightly, weekly in mutual funds of their choice. This systematic approach helps investors benefit from rupee cost averaging and the power of compounding over time.
Another method of investing in mutual funds is through lump sum investments. In a lump sum investment, investors allocate a single, larger sum of money into a mutual fund all at once. This approach is suitable for investors who have a significant amount of funds available upfront or for those who want to take advantage of market opportunities.
Both SIP and lump sum investments have their advantages and considerations. SIPs offer disciplined investing and mitigate the impact of market volatility, while lump sum investments provide immediate exposure to the market. The choice between SIP and lump sum depends on factors like investment goals, risk tolerance, and investment horizon.
Assessing your financial situation
Before deciding on your investment amount, you must understand your financial situation. Make an examination using these factors:
1. Financial evaluation
To begin with, assess your monthly income and expenses. Track how much you earn versus how much you spend. This way, you can understand your financial standing.
2. Debt prioritisation
Examine all your outstanding loans and credit card debts. Now, focus on paying off high-interest debts first. That’s because they cost more over time, and by paying them on priority, you can save significant interest costs.
3. Short-term goals
Identify your immediate financial goals, like buying a car or going on vacation. Set aside funds specifically for these goals to ensure you can achieve them without financial strain.
4. Long-term objectives
Next, consider long-term goals such as retirement or buying a home. Determine how these goals affect your mutual fund investment.
5. Emergency fund
Create a budget and save money for emergencies, like medical expenses or job loss. Be aware such a fund provides financial security and prevents you from dipping into long-term investments.
6. Risk tolerance assessment
Evaluate how comfortable you are with fluctuations in the stock market. Always try to match your investment choices with your ability to handle potential losses or gains.
Are you searching for the best mutual funds? Check out these different mutual fund categories for smart investing!
- Hybrid Mutual Funds
- Debt Mutual Funds
- Tax Saving Mutual Funds
- Thematic Mutual Funds
- Multi Cap Mutual Funds
- NFO Mutual Funds
Setting clear financial goals
After you have assessed your financial situation, now is the time to set clear financial goals. By setting them up, you can develop better mutual fund investment strategies. Let’s see how:
1. Short-term goals
Start with identifying your immediate financial objectives, like saving for a down payment or your children’s education. Now, determine how much money you need and set a timeline for achieving these goals. This will help you plan your investments accordingly.
2. Long-term goals
Next, determine your long-term goals, such as retirement. Estimate the amount you will need for a comfortable retirement and decide when you want to retire.
3. Risk tolerance
Now, match your risk tolerance with your goals. Be aware that for short-term goals, you should choose safer investments as they will preserve your money. On the other hand, for long-term goals, you can take on more risk, as you have more time to recover from market fluctuations.
4. Income and expenses
Most importantly, always try to align your investment goals with your income and expenses. Avoid committing to investments that can strain your daily finances. Always ensure your investment plans are realistic and fit within your financial capabilities.
5. Emergency fund
Ideally, you should keep a well-funded emergency fund to cover unexpected expenses. This prevents premature withdrawals, which could hinder your progress towards your financial goals.
How much money should I invest in mutual funds
Once you have assessed your financial situation and set clear goals, the next step is determining how much to invest in mutual funds. Let’s see how you can determine the right investment amount:
1. Prioritise debt
Firstly, focus on paying off high-interest debts like credit card balances before investing in any mutual fund scheme. Be aware that high-interest debt can quickly diminish your wealth. Hence, it is important to clear it first, as it will likely cost more than the returns generated from any investment.
2. Fund emergency and short-term goals
Before starting your mutual fund investments, make sure you have a well-funded emergency fund and savings set aside for short-term goals. Ideally, these funds should be a priority, as they cover immediate needs and protect you from having to withdraw investments prematurely.
3. Calculate monthly investment
To find out how much you can invest monthly, subtract your total monthly expenses from your income. These expenses must include savings for emergency and short-term goals. The remaining amount is what you can comfortably allocate to mutual fund investments.
4. Consider your risk tolerance
Next, match your investment choices with your risk tolerance and the time frame of your goals. You can invest more in stocks if you are comfortable with higher risk and have long-term goals. However, if you have a lower risk appetite or want to achieve short-term goals, consider safer options like bonds.
5. Systematic Investment Plan (SIP)
Use a Systematic Investment Plan (SIP) to invest a fixed amount regularly in mutual funds. SIPs help you stay disciplined and let you benefit from rupee cost averaging. Also, by investing a set amount of money regularly, you eliminate the need to time the market for the best entry points. In this way, you spread out your investments over time and smooth out the effects of market volatility.
Calculate how much to invest in mutual funds
When planning for financial goals, it’s essential to ascertain how much money you will need to invest each month to reach those goals. Usually, this process involves estimating the future cost of each goal and then determining how much you should invest monthly to meet that cost. Let us explain this in simple steps:
Step I: Identify your goals
First, list out the financial goals you want to achieve. For example, say you want to buy a car in 4 years, fund your child's higher education in 15 years, and save for retirement in 30 years.
Step II: Estimate the future cost of each goal
Next, determine how much each goal will cost in the future. For example, a car might cost Rs. 5 lakh in 4 years, your child's education might cost Rs. 25 lakh in 15 years, and you might need Rs. 3 crore for retirement in 30 years.
Step III: Calculate the monthly investment needed
This is the last step in which you will determine how much you need to invest monthly. To make a thorough evaluation, consider the time remaining to achieve each goal and the expected annual return on your investments.
Ideally, for long-term goals like retirement or education, you can prefer investing in equity mutual funds, as they can give you an average annual return of around 12%. On the other hand, for medium-term goals like buying a car in 4 years, a safer option is hybrid funds, which could yield around 9% annually.
Now, assuming that your monthly income is Rs. 60,000, see the table below to learn about the monthly investment needed to reach each goal:
Goal |
Target amount |
Time remaining |
Expected annual return |
Monthly SIP required |
Buying a car |
Rs. 5,00,000 |
4 years |
9% |
Rs. 8,500 |
Child’s higher education |
Rs. 25,00,000 |
15 years |
12% |
Rs. 5,000 |
Retirement |
Rs. 3,00,00,000 |
30 years |
12% |
Rs. 8,500 |
From the above table, we can observe that to achieve all your goals, you need to invest Rs. 22,000 per month. After setting aside this amount for investments, you will have Rs. 38,000 left from your Rs. 60,000 monthly income to cover your monthly expenses.
Additionally, always remember to prioritise your investments. This ensures that you are consistently working towards your goals. Also, as your income increases, consider increasing your investment amounts. This will help you achieve your goals faster and possibly take on new ones.
Step IV: Follow 50:30:20 Rule
To determine how much you should invest in mutual funds, a good starting point is the 50:30:20 rule. This budgeting strategy divides your income into three broad categories to balance your present expenses with future savings. According to this rule, allocate 50% of your monthly income towards essential needs such as rent, groceries, and utility bills. Then, reserve 30% for discretionary or lifestyle spending like shopping, dining out, and entertainment.
The remaining 20% should be strictly dedicated to savings and investments. This portion can include contributions to emergency funds, recurring deposits, and mutual fund investments—particularly SIPs (Systematic Investment Plans). For example, if your monthly income is Rs. 60,000, aim to invest Rs. 12,000 in savings and mutual funds. Within this amount, you can choose different mutual fund schemes based on your goals and risk appetite.
Importance of investing in mutual funds
- Diversification: Mutual funds allow investors to diversify their investment across a range of securities, reducing overall risk.
- Professional management: Mutual funds are managed by professional fund managers who make investment decisions based on extensive research and analysis.
- Affordability: Mutual funds enable investors to participate in the stock market with relatively small amounts of money compared to buying individual stocks.
- Liquidity: Mutual funds offer high liquidity, allowing investors to buy and sell their shares at any time, subject to market conditions.
- Accessibility: Mutual funds are accessible to a wide range of investors, including individuals, institutions, and retirement plans.
- Transparency: Mutual funds provide regular updates on their holdings, performance, and expenses, allowing investors to make informed decisions.
- Goal-oriented investing: Mutual funds offer investment options tailored to different financial goals, such as retirement planning, wealth accumulation, or saving for education.
Conclusion
Determining how much to invest in mutual funds requires careful consideration of your financial goals, risk tolerance, and investment horizon. By following these steps and considering your individual circumstances, you can develop a tailored investment plan that aligns with your objectives and helps you achieve financial security in the long run.
