How Much Should a Person Invest from salary in Mutual Funds?

Individuals who want to invest a fixed amount each month need to analyze their expenses, income and life goals before choosing what they can contribute. Here’s an article that provides more information on how one might go about determining this number.

There are typically 3 ways your income can be used: expenses, saving for emergencies and long-term investing.

 If you're able to invest about 40% of your income, then around 20% of this should be invested. The exact amount for monthly SIP plans can be difficult to decide, as you cannot change the stipulated rate later due to an alteration in priorities. So before fixing how much you will invest, keep these factors in mind:

Fixed Obligation to Income Ratio (FOIR) 

When determining how much money to set aside for SIPs it is necessary to look at your fixed obligations. These costs are necessary for meeting the basic requirements of surviving in life.

Suppose Vishwajeet has a monthly income of 50 thousand rupees. Here are her expenses:

The rent is 10 thousand..

The Electricity Bill is 5 thousand.

For Food and other utilities expenses is 5 thousands.

The total expenses are Rs. 2 thousand.

This is Vishwajeet's total FOIR.

The total amount of money that can be given to investments is Rs. 30,000 after taking away the fixed expenses like rent, Electricity and food and other utilities.

Thus, a minimum of Rs. 30,000 can be put into an SIP investment scheme by Vishwajeet.

Ideally, a higher FOIR implies it is beneficial to undertake investments in mutual funds. On the other hand, a lower FOIR indicates that less investments should be made.

Funds may be withheld in certain situations.

Sometimes a person’s income might not last them through a month, to offset this they need to keep aside money for unexpected expenses. They also need to maintain savings during times of emergency.

However, it would be wiser to keep your emergency corpus in liquid funds. Liquid funds offer both instant redemption and high liquidity.

There are two strategies you can use for emergency funds. One option is to keep your money in a bank account and earn interest, but this may only offer 2% returns as compared with the 6-7% offered through investing short term. The other option is to withdraw the fund at an ATM which makes it accessible when needed.

Long Term Goals From Saving Investment

How much money you save into a SIP plan should be determined by how much capital you want to accumulate for long term goals, the length of time until these goals are achieved, and how many funds your choice is spread across.

To determine a SIP amount in allocations, you must know how much money you want surrounding your retirement or children’s education. Next, analyze the stock market income and expectations. Finally, all of this can be analyzed together to determine how much should go into each SIP allocation.

Key Takeaways From The Blog

By investing consistently, a small amount of money goes a long way into future wealth creation. As your income increases, continuously increase the amount toward investments to accelerate wealth creation.

Best wishes with your investments!