How Much of Your Salary Should You Invest in Mutual Funds?

How Much of Your Salary Should You Invest in Mutual Funds?


One of the most common questions that a mutual fund investment planner gets asked is – how much of one’s salary should be invested into mutual funds every month? Is their any thumb rule that can help you arrive at an “ideal” figure? And as a lot of investment advisors say, is more always better? Here are some answers.

Start with a Financial Plan

Any good investment advisor or mutual fund investment planner  will suggest that you should not arrive at your investment plan in an ad hoc manner, but only after you’ve undergone a detailed Financial Planning exercise. A financial plan allows you to get some real perspective on your financial goals, and how your cash flows need to be planned in order to achieve them. In other words, instead of starting by saying “I should invest X in Mutual Funds” every month, you should ideally work with an investment advisor to map out your short- and long-term goals, adjust them for inflation and then back calculate in order to arrive at a monthly saving requirement based on the goal tenor and the subsequent amount of risk you can afford to take with each goal.

Let ratios be your guide

A few simple financial ratios can serve as a useful guide with respect to determining your ideal monthly saving amount. For example, your investment advisor may suggest that you should have a reserve-surplus ratio of at least 30% or 35% based on your current life stage. What this means is that out of every Rs. 100 that you earn post taxes, you should not be spending more than Rs. 65 or Rs. 70. These ratios can serve as important guide posts as your financial situation, including your income and liabilities, evolves over the years. 

More isn’t always good

An interesting fact is that “more isn’t always good” when it comes to investing into mutual funds. The amount that you are committing towards your SIP's every month should be comfortable enough to allow you to make enough lifestyle spends that leave you feeling fulfilled and happy. If your investment advisor asks you to invest an exorbitant amount every month (for example, 40% or 50% of your income) it’s quite likely that this plan may get started but will never really be completed! So make sure that the amount you are investing into mutual funds every month adequately allows you t balance your lifestyle spends with your future goals.

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