When considering mutual fund investments, determining how much of one’s salary to allocate is a critical decision. It involves striking a balance between meeting current financial needs and securing the future. This article explores various factors to consider when deciding the portion of salary to invest in mutual funds, offering insights to help make informed investment decisions.
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Factors Influencing Mutual Fund Investment Amount
One’s financial condition, ambitions, and risk tolerance are all distinct aspects that affect how much money one should invest in mutual funds. Here are some important things to consider before investing in mutual funds:
Step 1: Decide on the Goals
- Begin by listing future financial goals, such as buying a new car, owning a home, planning for retirement, or saving for a vacation.
- Determine how much to invest in mutual funds based on these financial goals, ensuring they are Specific, Measurable, Attainable, Realistic, and Time-Bound (SMART).
- Categorise goals into short, mid, and long term objectives to better organise the investment strategy and timeline.
Step 2: Goal Prioritization
- Realistically assess financial capabilities to determine if all goals are feasible within budget constraints.
- Prioritise goals based on urgency and importance. For example, paying off high-interest debt should take precedence over discretionary spending like travel.
- Long term goals such as retirement planning and children’s education should be given higher priority due to their significance and longer time horizon.
Step 3: Determine Investment Amount
- Determine top objectives and their respective timeframes to ascertain the necessary investment amounts.
- Calculate future costs associated with each goal and create a budget based on monthly income.
- Prioritise investing over spending in the budget to manage finances effectively and reduce unnecessary expenses.
- Example: With a monthly income, prioritise various goals such as purchasing a car within a few years, funding a child’s education over a certain period, and planning for retirement in the long term. For long term objectives, consider investing in mutual funds aiming for good growth, while for medium term goals, opt for hybrid funds with stable returns.
- As income grows, increase investments to achieve goals more quickly and pursue additional objectives.
Step 4: Follow 50:30:20 Rule
- The 50:30:20 formula, according to experts, is excellent for all financial strategies. The rule states that a person should set aside 50% of their income for necessities, 30% for desires, and 20% for an emergency fund.
- The term ‘needs’ describes costs that cannot be avoided. They include things like rent, EMIs, utilities, food, and other costs of daily living.
- ‘Wants’ are costs that one may live without but indulge in to raise their standard of living or gratify their wants. Jewellery, cosmetics, subscriptions to entertainment media, etc. are some examples of desires.
- Everyone should keep track of their spending in the wants area as wishes might be limitless in order to preserve their financial stability.
- Maintaining an emergency fund that is at least three times one’s monthly wage is advised by financial experts. This aids in covering any unforeseen circumstance, such as a handicap, loss of employment, illness that would require them to miss work, or anything else. This fund must get 20% from the 50:30:20 formula, and one can start investing once the fund has amassed three times its initial income. Thus, 20% of the salary can be dedicated to mutual funds. If less money is spent on wants, the amount can be raised.
Conclusion
There is no right or wrong answer to how much one should invest in mutual funds every month. The investment quantity should be determined by the monetary objectives one hopes to attain and the length of time one has to do so. One should determine the goals, order them in priority, and determine how much one must allocate each month to reach the objectives. Investing first, then using the remaining funds to spend, will be quite beneficial. Consulting with a licensed financial advisor like Share India might be helpful if one is unsure of how much to invest in mutual funds. Tailored advice can be provided based on an individual’s financial situation, goals, and risk tolerance.
