How Much Should You Invest in Mutual Funds?
You probably heard a lot of people talk about investing in mutual funds. What you may not know is that there are many different types of mutual funds, with varying investment strategies and risk tolerances for each one. The thing about mutual funds is that they can seem like a jungle at first – and no wonder when you look at the choices available! There's also the question of how much should you invest in them. There are different ways to answer this question.
In this article, we are going to examine some of the factors involved, so you can decide what is best for your situation.
Why mutual fund investment is good?
Most investors fail to accumulate a sizable investment portfolio since they are unable to invest with discipline. SIPs investment in mutual funds assists investors in maintaining a systematic approach to investing. One of the benefits of investing via mutual funds is that you may achieve a variety of financial goals, such as capital appreciation as well as income. Equity funds may help you build wealth via capital appreciation, whilst debt funds can assist you to earn income. Hybrid or balanced funds can assist you with capital appreciation as well as wealth growth. Mutual funds enable investors to invest funds in small amounts over a period, which is critical for wealth building. Moreover, mutual fund SIPs urge participants to stay disciplined in order to fulfil their varied financial objectives.
Every earning person should follow a 50:30:20 guideline in their personal financial planning. This is critical, particularly for a family's primary breadwinner. Following this regulation will guarantee that they have a financially secure tomorrow. This 50:30:20 guideline states that 50% of the overall income amount should be spent on necessities, 30% on pleasures, and the other 20% of the overall income on building emergency savings.
Necessities are those things without that you're unable to go about your regular existence. These include things like food, housing rent or EMI, utility bills, and so forth. Necessities can never be compromised, so you have no alternative but to spend money on them. Pleasures are things that aren't strictly required, yet you utilise them to improve your quality of life. Gym memberships, vacations, event tickets, subscriptions to internet streaming services, and so forth are some instances. Anyone should try to restrict their expenditure on these pleasures as much as feasible.
The other 20% of the overall income amount should be saved to create an emergency fund that is at least three times your monthly payment. After that, you may begin investing. As a result, your investments via mutual funds should equal 20% of your monthly pay given that you have 3 months of emergency funds saved and locked away. If you can reduce your expenditure on the pleasure component, you may use that money to increase your investment amount in mutual funds.
Factors affecting mutual fund investment amount
Here are some of the factors which affect your mutual fund investment amount:
The very first thing that affects the amount you can invest is the amount you are earning every month. Depending on your income, how much you can invest may be limited by your ability to pay for your necessities and other financial obligations. Therefore, you may not be able to maintain the 50:30:30 ratio. However, on the opposite side, if you can comfortably spend on necessities and pleasures from your monthly income, you should focus on spending less on the second component and increasing your investment amounts.
Financial objectives and investment tenure
Financial objectives and investment term is the second biggest thing affecting your investment amount. Before putting your hard-earned funds in a mutual fund, you need to make a list of your investment objectives and a definite timeline to achieve them. If you have short time periods to achieve high financial objectives, you need to invest more and vice-versa. In this process, an online mutual fund calculator can be your best friend. A mutual fund calculator can give you an estimate of how much you need to invest monthly or in a lump sum to achieve your investment goal amount.
Finally, you need to decide on the investment method. You can invest in either systematic investment plans (SIPs) or lump sum amounts. On one hand, investing in SIP plans offers you to invest small affordable amounts every month, gradually increasing your investment amount. On the other hand, lump sum investing amounts allow you to invest large amounts at once.
The bottom line
The bottom line is that investing in mutual funds is an easy, and affordable way to save for your long-term goal. There are many different options when it comes to mutual funds available depending on what kind of investor you are. If you are just starting or thinking about branching into the world of mutual fund investment, we recommend talking to a financial professional and using online tools like mutual fund calculators. This way, you can get ideas on how much you need to invest in order to reach your personal investment objective.