How Much Of Your Salary Should Be Invested Into Mutual Funds?

Mutual funds have become a popular investment option, particularly among the youth. One of the main benefits of mutual funds is the ability to invest small amounts frequently, which provides flexibility for investors. A common question among those considering investing in mutual funds is how much of their salary should be allocated towards these investments. In this article, let’s try and answer that question based on conventional financial wisdom.

There are three different areas where your income must be spread: spending on living expenses, saving for emergencies (emergency fund), and making long-term investments. If you have health insurance in place and have your own house where you do not have to pay rent, then you should have an emergency fund of at least 6 months' expenses. However, if you do have to pay rent and live in a high-cost-of-living area, it is recommended to have at least 1 year of emergency expenses saved up. Once you have set up the emergency fund, you can look to start investing a portion of your salary into investments like mutual funds. 

Ideally, financial experts recommend that at least 30% of your salary should go into investments every month. This ensures that your wealth keeps growing steadily over time and you can build up a decently sized corpus by the time your retire. However, mutual funds are only one type of investment among many others, and for the sake of diversification, you should ideally not invest more than 50%-60% of your total savings/investments into mutual funds. However, the final choice to decide how much you wish to invest in mutual funds rests in your hands. Another important thing to note is, as your income grows, you should try to keep your expenses the same and not let them get out of control. This will allow you to put an increasing amount of your income towards investments such as mutual funds over time, much more than the recommended 30%. 

Investing in mutual funds can provide returns that surpass inflation. Inflation reduces the spending value of money or investments over time. To retain the value of your investments, it is important to earn returns that exceed inflation, which can be achieved through mutual fund investments. Mutual fund investments can also be useful in financial planning for the future, especially when held for an extended period, such as five years or more. The compounding effect and long-term investments into mutual funds can lead to excellent returns in favourable market conditions, with potential returns ranging from 15% to 18% per annum.