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

With regard to investing, Indians are moving away from traditional assets to equity and debt mutual funds to build wealth in the long term. Mutual funds allow investors to invest via two options: Lump sum and SIP (Systematic Investment Plan). SIPs are considered a preferable option for salaried individuals, seeking an affordable and flexible investment approach.

Let’s explore a few investing rules salaried individuals can employ when investing in mutual funds.

The 15% Rule

In the 15% rule, you have to set aside 15% of your monthly income, meaning if you earn ₹40,000 a month, you need to save ₹6,000 every month. By putting aside ₹6,000 every month, in a year you'd have saved ₹72,000.

You can choose to invest this amount in mutual funds via lump sum or SIP, depending on your investment approach or contribute it towards building an emergency fund.

The 50:30:20 Rule

The 50:30:20 rule is a simple method, which will help manage your money. The rule breaks down your total income into three categories: essentials, enjoyment, and savings. Here's how it works:

50% for Essentials

Essentials include expenses towards groceries, mortgage, transportation expenses, utilities, rent, etc. Half of your income is allocated for the non-negotiables. These are the things you can't avoid paying for, as they are necessary for your livelihood.

30% for Enjoyment

Savings and investing do not mean you can’t spend on things you like. You must set aside 30% out of the total income for things you like to do for fun, for example, going to amusement parks, movies, small trips, restaurants, etc. This 30% ensures you can indulge in things you like without guilt.

20% for the Future

According to the 50:30:20 budgeting rule, allocating 20% of your income to savings and investments, such as tax-saving ELSS mutual funds, can be one way to allocate money towards long-term financial goals. The tax treatment of ELSS investments depends on the applicable tax regime and an investor's circumstances.

For example, if you earn ₹6,00,000 a year, you'd be investing ₹1,20,000 of your salary in mutual funds, which equates to ₹10,000 every month. This approach offers a consistent way to invest and helps in more efficient tax management.

FOIR

FOIR stands for Fixed Obligation to Income Ratio (FOIR) and acts as a financial health check-up, especially if you have multiple loans or credit cards. Banks and other lenders evaluate this ratio by how well you're managing and repaying your debts. Lenders commonly use a FOIR of around 40–50% as a reference range, though the threshold can vary by lender and borrower. This can assess whether you can cover your debts and still leave room in your budget for essential expenses and investing.

For instance, if your monthly income is ₹60,000, aim for debt payments between ₹24,000 and ₹30,000. This strategy helps assess whether there is room for other priorities, like savings or investments.

The 40% Rule

Under the 40% rule, after covering all fixed expenses, you can consider allocating 40% of the remaining income towards your chosen mutual fund. This approach will help you maximise your potential for wealth growth by allocating surplus income towards long-term investments.

For example, if you have ₹20,000 left after all essential expenses, an ₹8,000 investment can potentially boost your financial growth.

FAQs

How much of my salary should I invest in mutual funds?

To find out how much of your salary you must invest in a mutual fund, you can use budgeting rules like 50:30:20 to find your monthly savings out of your income and then invest this amount in mutual funds to build long-term wealth.

Can I invest a small amount every month?

Yes, you can invest a small amount in mutual funds every month or as per your preference via SIP to build wealth over the long term.

Should I invest before paying my expenses?

Essential expenses and emergency savings are important considerations when deciding how much to invest, and you can invest a portion of the remaining amount.

Can I increase my mutual fund investment later?

Yes, you can increase your SIP amount in mutual funds as your income grows.