Understand how much to invest in mutual fund

The investment market is beaming with mutual funds advertisements. You have often seen advertisements for various mutual fund schemes on social media and other platforms. Investing in top performing mutual funds in India comes with multiple benefits, which have even attracted millennials.

The benefits of investing in mutual funds are:

• You can start with any amount, even as low as 500.
• Diversify your portfolio across multiple stocks and other instruments.
• Can start a SIP
• No need to open a DEMAT account for investment.

However, for new investors question always remains the same, how much should you invest in mutual funds?

While there is no definitive answer to how much money you should invest in mutual funds. There is a method that can help you decide on the amount in a mutual fund to invest. Before going on the technique, let’s see various factors that you should consider before deciding on the top performing mutual funds in India to invest in.

Factors affecting the amount in a mutual fund to invest:

Everyone has different financial goals, stability, and salary, which decide the amount in a mutual fund to invest. So, let’s see how you should determine the amount to invest in top performing mutual funds in India.

Identify your financial goals:

Like everyone else, you would also have goals you would like to fulfil once you have enough money. In terms of personal finance, these goals are called financial goals. You must realise your financial goals to decide the amount in a mutual fund to invest in.

When deciding on a financial goal, it’s better to be as realistic as possible. The best to decide on a real goal is to follow the principle of SMART (Specific, Measurable, Attainable, Realistic, and Time-bound).

Prioritise your goals:

Once you have realised your financial goal, the next step is prioritising these goals. You may want many things as your goals, but some are more important than others. Prioritising these goals can help you decide better on the amount in a mutual fund to invest.

Calculate the amount to invest in a mutual fund:

Once you have realised and prioritised your financial goal, you have reached the final step. It’s time to decide the amount in a mutual fund to invest. This can be done by considering your monthly expenses and other commitments.

Amount to invest in a mutual fund:

If you want to invest smartly in a mutual fund, you should follow the rule of 50:30:20 rule. If you are a salaried employee, implementing the 50:30:20 financial plan ensures a safe and bright future for your family.

The 50:30:20 rule: 

According to the 50:30:20 rule, 50 per cent of your salary should be invested in needs, 30 per cent in wants, and the remaining 20% should be saved for emergencies.

Needs are those expenses that can’t be ignored, such as groceries, house rent, EMI, and other utility bills. On the other hand, wants are those expenses that aren’t essential but are required to maintain a better life quality. Costs such as gym membership, holidays, subscriptions to OTT platforms etc., come under wants. If you want to increase your amount in a mutual fund to invest, try to cut down the expenses from the wants section.

You must use at least 20 per cent of your monthly income to build an emergency corpus. The emergency corpus should be three times larger than your monthly salary. Once you have created an emergency corpus equal to thrice your monthly salary, you may choose a mutual fund to invest the remaining amount.

In short, you can invest around 20% of your monthly salary in mutual funds.

If you find the 50:30:20 rule a little overwhelming, you can also try the FOIR method. Because once you have selected a particular amount to invest in a monthly SIP, there is significantly less chance of decreasing it. So, before deciding the amount in a mutual fund, consider all possible scenarios.

The FOIR Principle

The FOIR stands for fixed obligations to income ratio, and as per the principle of FOIR, needs are paramount for survival. Moreover, you can’t compromise on needs. So, after fulfilling your essential needs, you can choose a mutual fund to invest the rest amount.

For example, if your monthly income is 50000 and your needs account for 20000, including all expenses, you have left with 30000. According to the FOIR, the available amount for investment is 30000, and you can use any amount up to 30000.

Typically, a lower FOIR value means you have a relatively higher investment amount and vice versa.

However, depending on the financial goal and security, you should save some amount in the emergency corpus before increasing the portfolio value. According to financial experts, keeping your emergency corpus as liquid assets is better. It’s because liquid assets offer high liquidity and are easier to redeem.

Liquid assets also greatly appreciate the deposited amount compared to the savings account. Typically, a savings account yields around 2% of yearly returns; compared to this, liquid assets give you around 6-7 per cent of annual returns.  

Now that you have understood the idea of the amount in a mutual fund to invest in, you may find the top 5 mutual funds in India easily. Investing in the top 5 mutual funds in India may provide you with a safe and steady return without depending much on the market conditions.

Conclusion:

Investing in mutual funds helps you secure your future. However, you shouldn’t invest all your money in mutual funds or any other investment option. It’s because even mutual funds are subject to market risks even after being the safest option.

Moreover, you must also set aside some part of your monthly salary as an emergency fund. You may also apply for a personal loan from Piramal Finance in case of an emergency.

Know your financial goal and health first, then decide by yourself. You must understand how much you can afford to invest in a mutual fund without compromising your lifestyle.

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