Mutual funds are one among the most buzzing investment options these days. It offers much-needed flexibility for investors to invest a sum as low as Rs 500 a month. Before you start investing in any investment option, there are certain things that you must ensure. You need to get your budget in place by allocating a fixed sum for all your expenses. After that, you need to set up an emergency corpus to fall back on at times of crisis before you assess your profile to determine how much you should invest in mutual funds. We have covered the following in this article:
1. Budgeting Rule
When it comes to budgeting, following the 50:30:20 rule would be the best. The rule states that 50% of your income must be allocated for needs. This includes rent/EMI, groceries, utilities and other similar expenses without which you cannot lead your regular life. 30% of your income must be allocated towards wants such as dining out, buying trendy outfits, upgrading to a new vehicle, vacation, and so on. The remaining 20% of your income must be utilised to realise your financial aspirations.
2. Emergency Corpus
20% of your income that you set aside to accomplish your financial aspirations must be first utilised to build an emergency corpus to fall back on at times of crisis. Emergency corpus must be at least six times your time monthly income. As you are going to rely on the emergency corpus at times of crisis, the corpus should preferably be accumulated in a regular savings bank account so that you can access it whenever you need. However, you must refrain from making withdrawals from the emergency corpus to meet any other expenses.
3. Profile Assessment
Once you have your budgeting in place and enough money is accumulated in your emergency corpus, the next thing you must do is invest. You have made an excellent choice of investing in mutual funds. Before you get started with your mutual fund investments. You must assess your profile and determine the suitable class of mutual funds.
Be it a short-term or long-term requirement; there are mutual funds to meet almost every requirement. If you are a risk-averse investor with a short investment horizon, then you may invest in debt funds. If you are ready to bear some risk and have a long-term investment horizon, then you may invest in equity or hybrid funds.
Now comes the question of how much should I invest in mutual funds? Well, it entirely depends on the requirements and investment horizon that you have. To start with, you may invest 20% of your income after making all other expenses. Also, see if you can avoid making unnecessary expenses and divert the same towards your mutual fund investment.
If you are to amass Rs 1 crore, then you can do this by investing Rs 15,000 a month for 15 years in mutual funds that offer 15% returns a year. If you feel 15 years is too long a duration to wait, then you can accumulate Rs 1 crore by investing Rs 30,000 a month for 11 years in a mutual fund offering 15% returns a year.
Like mentioned earlier, how much to invest in mutual funds completely depends on your requirement, risk profile, and investment horizon. Nevertheless, it would be best if you invest in mutual funds with a long-term investment horizon (five years or more). This will help you mitigate market volatility and beat inflation in the long run.
Furthermore, investing in mutual funds via a systematic investment plan (SIP) is beneficial as you don’t feel the pinch of setting aside a large portion of your income. At times of market fluctuations, SIPs will provide you with the benefit of rupee cost averaging, which helps you mitigate market volatility to a great extent.
Before you start investing in mutual funds or any other investment vehicle, it would be best if you assessed your requirements, risk profile, and investment horizon. Mutual funds would offer excellent returns when you invest with a horizon of at least five years.