Dear Investor How Much Money Should You Invest In A Mutual Fund?

By Mayank Bhatnagar

The mutual fund industry is full of generalised thumb rules – some say you should invest 30% of your income. Others advise you to start with Rs. 100 per month and build it up as you go along. Still, others advise you to put away whatever is left at the end of the month after your monthly expenditures have been taken care of.

Unfortunately, all these generalised suggestions are a very poor way to begin your mutual fund investing journey!

Also Read: Which Mutual Fund Is Suitable To Start Your First SIP?

Without a doubt, mutual funds are the best way to invest for your long-term goals, across all available asset classes. After all, they are structured as a trust; your money is safe, tightly regulated, transparently managed, is amongst the lowest cost and, with more than 3000 schemes available, can be customised as per your unique requirements. Which other asset class can boast of all of the above?

Apart from the above, mutual funds have the capability of beating inflation by a factor of 2-3 times returns over a long duration on a post-tax basis. This is something most investment asset classes would come nowhere close to.

100% of your long-term portfolio (5 years +) can and should be allocated to equity mutual funds. The catch is that you need to understand risk and reward before investing and begin by setting correct expectations right off the bat, or else your journey will get derailed very quickly!

Once you have decided where to invest, the next step is to figure out how much you need to invest. Do not fall into the trap of investing some arbitrary amount! These ad-hoc investments will lack resilience and not serve any real purpose. It is extremely important to invest according to a set plan, one that incorporates relevant and clearly defined goals.

The best way to calculate how much you need to invest in mutual funds would be according to your financial goals. Some top goals that our clients save for include their retirement, kids’ education or marriage expenses, prepaying a home loan, setting up an emergency fund, or even saving up to make a down payment for a new vehicle.

A qualified investment expert can help you define these goals, prioritise them, and also factor inflation into the equation so that the target amount helps you meet your stated objectives when the date arrives. For example, an MBA degree that costs Rs. 10 lakhs today will probably require between 32-35 lakhs in the year 2040, assuming the standard 7-8% inflation that education costs are escalating at in India.

The good news is that since you have time on your side, even a monthly SIP of Rs. 4,000 can help you meet this goal if channelised into the right fund.

Once you have identified your purpose and the amount required to meet the goal in the future, you will find that this scientific approach now allows you to quickly figure out the amount required to meet these important goals.

It often happens that this amount is larger than what you would like to set aside considering your financial situation today. This is where goal prioritisation comes in and gives you the option of starting with your highest priority goal and then slowly over the next few years stepping up your investments to meet your other goals, as your income goes up. The power of disciplined step-ups can be quite incredible!

While the above process can get you to start investing the right way, one must remember that remaining invested is the key.

One must ensure that the amount invested towards goals is not used for funding frivolous lifestyle spending. Your goal-based investments should be sacrosanct – only an absolute emergency should force you to break the proverbial piggy bank!

Market noise and sensationalised headlines should not entice you to start trying to time the market. Most importantly, do not start chasing returns based on comparisons with others’ investments.

Make sure you get expert help, not just to identify your goals and the calculations around them, but also so that professionals can help you remain invested despite market volatility. Resilience is the key to being a successful investor! Getting started is easy, remaining invested and creating wealth is a whole different ball game.

-The author is Co-founder and COO, FinEdge. Views expressed are personal.

first published: January 27, 2024, 15:37 IST

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