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How Much Of Your Salary Should You Invest In Mutual Funds?

20 June 2022

As a salaried person, you might be wondering, “How Much to Invest in Mutual Funds?” and “How Much to Save From Salary?”. Recently, we've been getting a lot of inquiries from investors asking what the ideal monthly investment for a salaried person is. There is undoubtedly a way to calculate this number, even though it depends on a number of factors.

In this blog, we will try to break down the procedure and go into more detail about the elements that will affect how much money you can set aside for investing. Read on further to know more!

Generally speaking, you can use your income for three primary aspects: expenditure, saving for emergencies, and long-term investments.

According to the general rule, if you can invest about 40% of your income, then 20% of this must be allocated to investments. Choosing the exact amount for monthly SIP can be challenging because you might or might not be able to change it later due to a change in priorities. Therefore, bear the following considerations in mind before fixing an investment's value: 

FOIR

FOIR Full-FormFixed Obligations to Income Ratio

Before allocating a portion of a monthly salary for SIP payments, the Fixed Obligations to Income Ratio must be established because these costs are essential to ensuring that an individual can meet their basic needs.

Let us demonstrate this with an example. Suppose Nysa has a monthly income of Rs. 50,000. Her expenses can be listed as follows:

Rent = Rs. 10,000

Electricity Bill = Rs. 5,000

Food and other utilities = Rs. 5,000

Total Expenses/FOIR = Rs. (10,000+5,000+5,000) = Rs. 20,000

This represents the total FOIR of Nysa.

Total income available for investments = Total income – FOIR = Rs. (50,000-20,000) = Rs. 30,000

Thus, Nysa can decide upon any amount up to Rs. 30,000 for the SIP investment scheme.

Ideally, a lower FOIR implies a relatively higher value of investments can be undertaken in mutual funds, and vice versa.

Precautionary Withholdings of Fund

A portion of the remaining income left over for investment purposes, which can be calculated by subtracting FOIR from monthly salary, must be set aside by individuals to cover any unanticipated costs.

During emergencies, Precautionary Funds must be kept on hand. Savings accounts or cash can be kept on hand as resources for this purpose. However, it would be wiser to keep your emergency fund in liquid assets. These funds offer high liquidity, as their name would imply, and the majority of them also provide instant redemption.

As a result, you can easily access your emergency fund when you need it. In comparison to a savings account, which typically yields returns of 2%. It also offers a greater appreciation of the deposited amount, to the tune of 6-7%. Before looking into the SIP plans that are available for long-term investing, accommodations for this purpose must be made.

Long-Term Goals

A person's investment in a SIP plan should align with their financial objectives. Your SIP amount is also influenced by the corpus you want to build up for your long-term goal, the time horizon, and the funds you choose.

Your SIP amount will be determined by the funds you choose, whether they are Aggressive Growth Funds or Debt Funds, as well as the amount you would like to set aside for retirement or your children's education. Depending on the expected returns and income from the stock market, the total amount of the SIP investment should be carefully considered.

Conclusion

Saving a small portion of your monthly income goes a long way towards future wealth creation. Investing is more about persistence and consistency rather than a one-time thing. As your income increases, proportionally increase the amount towards your investments for accelerated wealth creation. Make strategic planning while finding a solution for how much invest in mutual fund because investing your salary the right way is highly recommended.

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww.

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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