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

When it comes to salaried professionals looking to invest in mutual fund via SIP, there are several factors to consider before arriving at a number

One of the key fundamentals that differentiates investing from saving is that investments are strategic, goal-oriented, and based on future requirements instead of simply putting away some cash in an investment instrument.

Hence, a question that often comes up when investing is how much you should invest. When it comes to salaried professionals looking to invest in mutual fund via SIP, there are several factors to consider before arriving at a number. While you can start with as little as Rs.500 per month, it is important to realize that you need to review this amount in context of your investment portfolio goals, your current age, your risk appetite and so on. 

Here’s a comprehensive guide to understanding how much percentage of your salary should you start investing in mutual funds with SIP.

While reading this guide, make it a point to involve family members who would be impacted by your investment decisions. Such involvement and discussion could give you more clarity about their goals and hence, the corpus and investments you require to make for funding the same.

List Down Your Goals

The first thing you need to do before you can start investing in SIP-based mutual funds is identify goals along with timelines. This will help you use investment calculators, available online, effectively. For instance, if you want to have a Rs.1 crore corpus for buying a home in 5 years, then you can use SIP calculators to learn how much you need to invest on a monthly basis in mutual funds via SIP to arrive at that corpus within the time frame.

Similarly, consider inflation costs and arrive at amounts related to investments for your child’s education, your travel goals, and your retirement planning among others. Basis this, you can clearly arrive at how much you need to invest from your salary towards each of your investment goals.

Remember, if the total amount you need to invest every month in SIP-based mutual funds exceeds what you can afford to invest, you can choose to prioritize a key goal rather than compromise on all investment goals.

Additionally, most platforms that you will use to make your SIP-based mutual fund investment will offer a dynamic tracker and calculator; depending on your SIP-based mutual fund investment’s performance, these trackers will show you how you need to reconsider (add or reduce) the percentage of salary that you are investing.

Consider Your Risk Appetite

It is important to remember that depending on the type of mutual funds you choose, they are partially or entirely linked to market performance. Hence, the returns are not fixed and vary based on market trends. Hence, you need to view your SIP investment and corpus goals in context of your mutual fund’s risk exposure and your appetite for the same.

For example, if you are choosing to invest in small-cap mutual funds, the risk and returns potential is higher as compared to mid-cap and large-cap mutual funds. Hence, small-cap mutual funds may require to you to invest a lesser percentage of your salary via SIP in mutual funds to meet your investment goals. At the same time, there are higher chances of performance volatilities with this type of mutual funds.

On the other hand, a large-cap mutual fund could require you to invest a slightly higher amount every month since the returns could be lower as compared to mid-cap and small-cap. However, in comparison, they tend to be considered less risky.

Hence, depending on how your salary, age, and corpus requirement define your risk appetite, you can arrive at an estimate in terms of how much you should invest in SIP-based mutual funds.

Factor in Add-On Benefits

It can be a real challenge to invest a substantial percentage of your salary into SIP-based mutual funds. This is because you might also need to invest towards other financial goals such as term insurance. However, this doesn’t mean you have to compromise on the amount you are able to dedicate towards SIP.

There are some unique SIP-based mutual funds come with add-on benefits such as term insurance at no additional cost to you. When you invest in such products, you can meet two goals at once – meet your investment goals as well as your insurance goals – without making any additional investment.

While investing in such products, you need to calculate both – your investment corpus needs, as well as your term insurance needs. For instance, if you are looking at Rs.12 lakhs of term insurance cover, and you are eligible for a sum assured that is 120 times the SIP value, you are looking at investing Rs.10,000 on a monthly basis. Additionally, you need to factor if such a SIP investment amount is also adequate to fund your investment goal, be it your child’s education or your retirement. In this manner, you can get twice the value for your SIP investment.

A Quick Recap

To sum it up, there isn’t a one-size fits-all approach to how much percentage of your salary you should put towards SIP and mutual funds. Of course, there are some conventional formulas that suggest you should invest a particular percentage of your income every month to cover for inflation and your retirement lifestyle needs. However, these remain indicative. Each person is unique in terms of their goals, corpus requirements, risk-appetite, age when starting SIP-based mutual funds, and so on.

Hence, while you may use such formulas to arrive at broad estimates, it is best to do the math basis the 3 factors discussed above to arrive at an accurate understanding.

Lastly, always consider inflation as well as a 5 to 10% buffer with regards to corpus goals. This will ensure you don’t underestimate; after all, planning is the key to succeeding in all facets of life, including SIP-based investing.

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