Mutual funds are one of the most popular ways for people to make investments and generate wealth over time. They also offer diversification and professional management with many options that support different financial goals. One of the common questions that arise with persons earning a salary is “How much of my salary should I invest in mutual funds?” The answer depends on several factors, such as your income, expenses, goals, and risk appetite – but here’s a straightforward and useful approach to help you find the answer.
The 50-30-20 Rule: An Effective Starting Point
- 50% of your salary should go to needs (rent, bills, groceries)
- 30% for wants (lifestyle choices, travel, dining out)
- 20% for investments and savings
Of that, you will likely put most, if not all, of the 20% into mutual funds especially if your goal is a long-term planning goal such as:
- Home ownership
- Retirement
- Educating your children
- Financial independence Corpus
A Salary-Wise Breakdown: How Much to Invest?
1. If your monthly salary is in the range of ₹30,000–₹50,000
- Invest 10%–15%
- Before aggressively investing and for your emergency fund (emergency savings should arrange for at least 3 months of expenses!)
- Choose amounts starting from as low as ₹500 (via a SIP format) in SIPs of equity mutual funds.
- You can also invest in ELSS funds in case you also want to save for taxes.
2. If your monthly salary is in the range of ₹50,000– ₹1 Lakh
- Invest 15%–25%
- Diversify your investments between equity and hybrid mutual funds to achieve the best of both worlds!
- Look for investments that match your goals, i.e. either mutual funds with short-term horizons (debt funds) or long-term horizons (put in equity or index funds).
3. If you have a monthly salary of ₹1 Lakh+
- Invest anywhere between 25% to 40%+ into diversified portfolios, depending upon your existing lifestyle and liabilities.
- On a regular basis, invest across a combination of large-cap, mid-cap and/or thematic funds in a target-level diversified portfolio.
- Focus on increasing the SIP amounts correspondingly on a yearly basis, and keep investing that proportion of the increase in income.
How to Get the Most out of Your Mutual Fund Investments
- Start early: A small SIP will grow so much over time thanks to compounding that you’ll hardly recognize it
- Gradually escalate your SIPs: You can easily increase investments annually
- Align your investments with your financial goals: Don’t just invest for the sake of it
- Make use of tax-saving funds: Mutual funds that are Equity Linked Savings Schemes ELSS qualify for Section 80C deductions
- Review your portfolio once or twice a year – don’t confuse this with monitoring too much
Also read: Loan Against Mutual Funds: Should You Choose Equity or Debt Funds?
Don’t Forget the Basics
- A health insurance policy
- Emergency Fund
- Needless credit card dues
- The returns from mutual funds aren’t guaranteed, and the markets are subject to fluctuations along the way – even more so when it comes to equity funds.
Conclusion
There is no perfect answer, but as a rule of thumb, you should aim to at least invest a minimum of 20% of your salary into mutual funds. If you are in a good position financially, you might consider a higher allocation as that will help you reach your desired level of financial freedom faster. The important thing is to start, stay consistent, and align your investments with your goals.
Written by Pranjal Data
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