Modules for Beginners
All about mutual funds
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How much should you invest in mutual funds?
You’ve read up quite a bit about mutual funds, and you believe that it is the right product for your portfolio in the current situation. So, you are interested in investing in mutual funds and you’re quite eager to get started. But then, there’s a crucial question hovering over you - How much should you invest in mutual funds?
Is there a magic number? Or do different people decide to invest different amounts based on various factors? Well, the latter, of course. So, how do you go about finding the right amount that you should invest in mutual funds? As it turns out, there are two different strategies that you can use. Here is a closer look at your options, so you can understand them and pick the investment strategy that works best for you.
Option 1: Adopt a budgeting rule like the 50:30:20 rule
This option works best if you are just getting started with investing, and your end goal is generic wealth creation. In that case, you do not have any specific amount that you need to save up within a given period of time. Instead, you are constrained by your budget. That is why a budgeting rule can help you with your mutual fund investments.
One of the most popular strategies that you can follow is the 50:30:20 rule. Here’s how this works into your financial plan.
- 50% of your income goes towards your needs
- 30% of your income goes towards your wants
- 20% of your income goes towards your investments and savings
This essentially means that 20% of your income can be redirected towards your mutual fund investments. So, if you are earning Rs. 50,000 each month, you can start an SIP for Rs. 10,000 each month. If you want to diversify your portfolio within this 20% allocation, you can choose to invest in two different kinds of mutual funds.
This budgeting rule can help you invest in mutual funds in a disciplined manner. Also, it is only one of the many rules you can adopt. You can revise the proportion allocated to needs, wants and investments if you believe a different ratio works better for your financial situation.
Option 2: Invest based on your end goals
Let’s say budget is not much of a constraint for you. However, you are considering investing in a mutual fund for a specific, time-bound goal. A common example would be a medium-term goal like a premium purchase. Say you want to buy the car of your dreams in around 4 years’ time. And suppose that the vehicle would cost around Rs. 8 lakhs.
So, your end goal is to build a corpus of Rs. 8 lakhs within the next 4 years. This means that you need to plan your mutual fund investments in a manner that helps you achieve this end goal. A goal-based SIP calculator can help you figure out how much you should invest in mutual funds in such a scenario.
Let’s consider the parameters.
- You have a goal amount of Rs. 8 lakhs
- You can invest consistently for 4 years
- The mutual fund of your choice gives returns at around 10% per annum
In this case, you can use an SIP calculator to determine that your monthly investment amount should come up to around Rs. 13,623.
Things to keep in mind when you are deciding how much to invest in mutual funds
In addition to the strategies mentioned above, there are a couple of important things you need to keep in mind about investing in mutual funds. Check them out below.
The ideal amount to invest in mutual funds will vary over your lifetime
The ideal amount that you should put into mutual funds will vary over time, based on your income, your existing liabilities and your financial goals. Remember to revisit your investment strategy periodically, so that your investment budget is optimised according to your needs. If you continue to invest the same amount even when your financial situation and your goals have changed, you may be making poor investment decisions.
Always err on the side of caution when you are calculating your SIP amount
Calculating the amount you need to set aside for mutual fund investments depends on factors like the target amount, the investment horizon and the rate of return you can expect. This last metric is not set in stone, and it is only determined based on past data and the fund’s assets. So, remember to err on the side of caution and take on a cautious rate of return when you calculate the ideal investment amount.
That sums up the details of how you can figure out the amount you need to invest in mutual funds. In case you are having trouble figuring it out, you can always approach a financial expert for advice. And aside from the amount to invest, you also need to be sure about the kind of mutual fund to include in your portfolio. Not sure about what the different types of mutual funds are? Head to the next chapter for the details.
A quick recap
- You can make use of a budgeting rule like the 50:30:20 rule to decide on the investment amount.
- Alternatively, you can arrive at the SIP amount based on your target or financial goal.
- Remember that the ideal amount to invest in mutual funds will vary over your lifetime.
- And always err on the side of caution when you are calculating your SIP amount.
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