How much salary should you invest in mutual funds? Here’s a calculation guide

Imagine a life where your money works for you, not the other way around. A life where financial worries fade and dreams take centre stage. That’s the magic of mutual funds – a powerful tool for building wealth and achieving financial freedom. But the question that often hangs in the air like an unanswered prayer is: how much should I invest?

Fear not, fellow dreamers! This article is your roadmap to navigating the investment highway with confidence. We’ll crack the code on how to determine the ideal percentage of your salary to allocate to mutual funds, factoring in your unique circumstances and financial goals.

Step 1: Assess your needs and wants (The 50-30-20 Rule)

Imagine your salary as a delicious pie. The 50-30-20 rule suggests dividing it strategically:

50% goes to “Needs“: These are non-negotiables like rent, groceries, utilities, and essential debt payments. Think of them as the crust – keeping everything together.

30% goes to “Wants”: This slice includes everything from dining out and entertainment to subscriptions and impulse purchases. It’s a tasty filling but can be adjusted for more investment.

20% goes to “Savings and Investments”: This is your golden nugget – the portion dedicated to building your future, and mutual funds can be a delicious way to diversify it.

Step 2: Build your emergency fund

Before scooping up mutual funds, prioritize an emergency fund. Aim for 3-6 months of living expenses to cushion unexpected bumps like job loss or medical bills. Consider parking it in a liquid, low-risk account.

Step 3: Calculate your available investment amount

Now, subtract your “Needs” and “Emergency Fund” from your salary. This remaining sum is your potential launchpad for mutual fund investments. Let’s call it X.

Step 4: Factor in your risk tolerance

Are you a thrill-seeking investor who can handle market fluctuations? Or do you prefer a calmer ride? Your risk tolerance plays a crucial role. Generally:

High Risk Tolerance: Invest up to 70% of X in equity-focused mutual funds for potentially higher returns, but with more volatility.

Moderate Risk Tolerance: Balance it out with 40-60% in equity funds and the rest in debt funds for a blend of growth and stability.

Low-Risk Tolerance: Prioritise stability with 20-30% in equity funds and the rest in debt funds for lower volatility, but potentially lower returns.

Step 5: Consider your goals and timeline

Are you saving for a down payment in 5 years or retirement in 30 years? Longer timeframes allow for higher equity allocation and greater potential returns. But short-term goals might require a more conservative approach.

Calculations: Putting theory into practice

Let’s say you earn a monthly salary of Rs 50,000. Using the 50/30/20 rule:

Needs: Rs 25,000 (50%)

Wants: Rs 15,000 (30%)

Wealth Creation (Mutual Funds): Rs 10,000 (20%)

Remember: This is just a guide! Adjust the percentages based on your unique circumstances and seek professional financial advice if needed.

Start small and increase your investment amount over time as your salary grows or your “Wants” shrink. Consistency is key!

Investing in mutual funds can be a rewarding journey, and now you have the tools to calculate your ideal starting point. Go forth, salary earners, and crack the code to a financially secure future!

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.