How Much Salary To Invest in Mutual Funds?

Mutual funds can be the cornerstone of your financial success. By understanding their benefits, aligning them with your goals and investing consistently, you will be well on your way to achieving your financial dreams. The article highlights how you can use mutual funds to make your dreams come true 

Mutual funds have come a long way in the investment portfolio of retail investors. This is reflected in the number of accounts that have increased over the last couple of years. The number of investors account has increased from 9.79 crore at the end of FY22 to 17.79 crore at the end of FY24. These accounts, known as folios, represent multiple accounts held by individuals across various funds. Hence, this is therefore not a count of the number of investors but the number of accounts. Most of these accounts are held by individual investors. 

Out of this total 17.79 crore accounts, the share of retail investors was 16.26 crore, accounting for 91 per cent of total accounts. Such an increase in accounts has led to higher share of retail investors in the overall assets of the industry. Individual investors now held 60.6 per cent of the total assets in May 2024, compared with 55 per cent in May 2022. In the same period,mutual funds’ assets under management (AUM) have gained by 58 per cent. This has increased from ₹37.22 lakh crore at the end of May 2022 to ₹58.91 lakh crore at the end of May 2024. 

What is heartening to note is that the retail investors’ assets of mutual funds have increased at a much faster pace. Compared to an industry increase of 58 per cent, retail investors saw their assets increasing by 74 per cent in the same period. This has increased from ₹20.4 lakh crore to ₹35.7 lakh crore in the same period. Even within these assets, 85 per cent or almost ₹30 lakh crore is held in the form of equities. This robust growth underscores the growing importance of mutual funds in retail investors’ financial plans, emphasising their effectiveness in achieving several financial goals. 

As mutual funds offer an accessible and effective way to build wealth, they are becoming a cornerstone in the financial strategies of many individuals. Mutual funds offer a low-cost path to building long-term wealth. They provide the much required diversification, spreading your risk across a basket of stocks or bonds and minimising the impact of any single company’s performance or any single asset performance. They act as your financial toolbox, offering options to cater to your diverse goals, whether short term or long term. 

For example, they can be used for retirement planning, which is a long-term goal. You can consider growth-oriented equity funds that capitalise on the stock market’s historical upward trend. For medium-term goals such as the education of your child, balanced funds, with a mix of stocks and bonds, offer a steadier growth path while managing risk. You can also use Debt Funds to make a down payment for your house as you approach your purchase date, prioritising capital preservation closer to your goal. 

A Personalised Approach
Now that we understand the importance of mutual funds in managing financial goals, the next factor is about how much you should invest in mutual funds each month. Many investors are unsure about the ideal amount to invest and, unfortunately, there is no magical number that suits everyone. Each investor has unique needs and income levels, so there isn’t a one-sizefits-all answer. 

However, there is a method to determine the appropriate amount to invest in mutual funds. By considering certain factors, you can tailor your investment strategy to your personal circumstances. In the following paragraphs, we will elaborate on these factors to help you decide how much you should invest in mutual funds. This approach will ensure that your investment plan aligns with your financial goals and risk tolerance. 

Step 1: Identify Your Goals — The first and most crucial step in determining how much to invest in mutual funds is to identify your financial goals. Your goals can be categorised into short-term, medium-term and long-term objectives. Shortterm goals might include creating an emergency fund, saving for a vacation, or buying a gadget. Medium-term goals could be purchasing a car, funding education, or down payment for a house. Long-term goals generally encompass retirement planning, children’s higher education, or building a substantial corpus for financial independence. 

Each goal should be clearly defined with a specific time horizon and target amount. You should be SMART (specific, measurable, attainable, realistic and time-bound) about your goals. For instance, you want to be wealthy is an ambiguous goal. But a plan to accumulate ₹50 crore (you perceive that if you have ₹50 crore you will be wealthy) in the next 10 years is an example of a SMART goal. For instance, if you aim to save for a down payment on a house in five years, you need to calculate the total amount required and work backwards to understand how much you need to save and invest regularly to accumulate the required amount. 

Similarly, for retirement, you should estimate the corpus needed based on your desired lifestyle and inflation rates and then determine the annual or monthly investments required to achieve that corpus. Identifying your goals not only gives direction to your investment plan but also helps in selecting the right type of mutual funds. For short-term goals, you might prefer low-risk, liquid funds, while long-term goals can be achieved through equity funds which offer higher returns over time despite their short-term volatility. This goal-based approach ensures that your investments are aligned with your financial aspirations and timelines, making it easier to stay focused and disciplined in your investment journey. 

Step 2: Prioritise Your Goals — Once your financial goals are identified, the next step is to prioritise them. Since resources are limited, prioritising your goals helps in managing your resources efficiently and ensures that the most critical objectives are funded first. To prioritise, categorise your goals based on their importance and urgency. Essential goals like creating an emergency fund, retirement planning or children’s education should be at the top of your list because they have significant impacts on your financial security and wellbeing. 

An emergency fund is non-negotiable and should be your top priority. This fund acts as a safety net during unforeseen circumstances like medical emergencies, job loss or urgent repairs. Typically, it should cover 3-6 months of your living expenses including all the EMIs and be invested in highly liquid, low-risk mutual funds. 

Retirement planning is another high-priority long-term financial goal. The earlier you start, the more you benefit from the power of compounding. Prioritise retirement contributions even if it means delaying less critical expenses or investments. Medium-priority goals might include accumulating down payment for buying a home or a car, while low-priority goals could be funding a vacation or luxury purchases. 

Evaluate the time horizon for each goal and the consequences of delaying them. For example, postponing a vacation might be acceptable, but delaying a child’s education is simply dreadful. Similarly, delaying for your retirement savings could significantly impact your future financial stability. By prioritising your goals, you can allocate your income effectively, ensuring that essential and urgent needs are met first. This hierarchical approach helps in making informed decisions about how much to invest in each mutual fund category, ensuring that your financial plan is both realistic and achievable. 

Step 3: Calculate How Much to Invest — After identifying and prioritising your goals, the final step is to calculate the investment required in mutual funds to achieve these objectives. This involves detailed budgeting to assess your income, expenses and savings capacity. Begin by determining your total monthly income and subtracting essential expenses such as housing, utilities, groceries and transportation. The remaining amount is your disposable income, which can be allocated toward savings and investments. 

A commonly recommended strategy is the 50-30-20 rule. According to this rule, you should categorise your post-tax income into three broad categories: 50 per cent for needs, 30 per cent for wants and 20 per cent for savings.
■ Needs — Allocate up to 50 per cent of your income to essential expenses, financial obligations and other responsibilities. This includes rent, utilities, groceries, healthcare, insurance premiums and education fees.
■ Wants — Dedicate 30 per cent of your income to lifestyle choices. This can include dining out, entertainment, hobbies, vacations, luxury items and non-essential electronics. While not always necessary, this allocation allows you to enjoy your preferred lifestyle while maintaining financial discipline.
■ Savings and Investments — Set aside 20 per cent of your income for savings and investments. This provides a cushion for financial emergencies, medical treatments and maintenance of assets like your house or car. Savings also prepare you for long-term goals such as buying a house, funding your child’s education or wedding, and ensuring a comfortable retirement. 

However, this allocation can be adjusted based on your financial situation and goals. For instance, if you have aggressive financial goals, you might choose to invest a higher percentage of your income. Next, calculate the investment required for each goal by considering the target amount, time horizon and the expected rate of return. Online calculators and financial planning tools can help estimate these figures. For example, if you aim to accumulate ₹10 lakhs for a down payment in five years and expect an annual return of 8 per cent from mutual funds, you can use a systematic investment plan (SIP) calculator to determine the monthly investment needed. 

Ensure that your total investments align with your disposable income and prioritise according to your goal hierarchy. Start with high-priority goals like retirement and emergency funds and then move to medium-priority and low-priority goals. Regularly review and adjust your investment plan to accommodate changes in income, expenses and financial goals. By systematically calculating and allocating your investments, you ensure a disciplined approach to mutual fund investing, aligning your financial resources with your long-term aspirations. The following example will give you a sense of how you can plan for your savings and investment and also the percentage of your income required to invest. 

Investment Strategy and Expected Returns
1. Down Payment (5 Years) — Debt funds are recommended due to their low risk and focus on providing predictable returns. An expected return of 8 per cent is a reasonable assumption for debt funds.
2. Child’s Education (15 Years) — Balanced funds offer a good balance between growth (stocks) and stability (bonds). An expected return of 12 per cent is a possibility with a balanced fund strategy over a long-term horizon.
3. Retirement (25 Years) — Equity funds offer the potential for higher returns but come with higher risk. A 15 per cent expected return is a possibility with an equity fund strategy over a very long-term horizon, but keep in mind that as you approach the retirement age you need to switch your accumulated corpus towards fixed income securities. 

The table above clearly shows that if you have only these three goals, the total amount that you need to invest every month is around ₹24,780. Considering this as a 20 per cent of your total income, you need to be earning ₹1.25 lakhs per month. In case you are earning less than this, you can adjust wants to fulfil the criteria. 

Points to Remember
■ This is only for illustration purpose, and you might need to adjust the investment strategy and expected returns based on your risk tolerance and market conditions.
■ Remember to diversify your investments within each category (debt, balanced, equity) to further manage risk. Regularly review and adjust your investment plan as your goals and circumstances evolve.
■ Younger investors have a longer time horizon to ride out market fluctuations and so they can allocate a higher percentage to equity funds. As you age, consider gradually shifting towards a more conservative mix with a higher bond allocation.
■ Are you comfortable with short-term market fluctuations? If not, a more conservative mix with a higher bond allocation might be suitable.
■ The timeframe and nature of your goals play a role. Short-term goals might require a higher allocation to bonds for stability, while long-term goals can benefit from a more growth-oriented approach with a higher equity allocation. 

Conclusion
Mutual funds can be the cornerstone of your financial success. By understanding their benefits, aligning them with your goals and investing consistently, you will be well on your way to achieving your financial dreams. There is no single success formula. The answer to how much of your total income should go towards investment each month in mutual funds will depend upon various factors. The amount should be determined by the financial goals you aim to achieve and the timeframe for reaching them. Start by identifying and prioritising your goals and then calculate how much you need to invest monthly to meet these objectives.