If you are about to enter the job market, it is of the utmost importance for you to have a financial plan. Financial planning is the act of planning out the possible expenditures that you may occur throughout your career. Most people have the misconception that just having an expenditure plan is enough to save money for retirement. However, that’s not the case. If you are serious about accumulating long-term wealth to save for retirement, you need to consider investing in the market. Mutual funds and their variants can help you in acquiring wealth.
What are mutual funds?
These funds are investment tools that are known for pooling money from a group of investors. Money is collected from a group of investors to purchase different securities. The said financial securities usually consist of things like gold, bonds, stocks, and several other money market instruments.
How do they work?
These funds essentially function as a trust which is known for collecting money from like-minded investors. After you have selected the type of mutual fund scheme, AMCs take over the responsibility of managing and operating your mutual fund portfolio. Depending on the fund’s objective (for which you opted for it in the first place), the pooled money is allocated to different avenues such as stocks, bonds, gold, and other securities. A fund manager is responsible for overseeing each fund. The income later generated by the fund is divided and distributed among the investors proportionately.
How much your salary should be invested in mutual funds?
Amongst the most prominent investment options, people allocate their money to mutual funds because they get to accumulate wealth for the future even by investing a small amount frequently through SIP. But the question still arises. The said question is “how much of my monthly salary should be allocated to mutual funds?” Well, continue reading to find out.
If you are a working professional and have devised a financial plan, please make sure that the 50:30:20 rule is part of it. It is very important to include this rule, especially if you happen to be a breadwinner. Under this rule, 50% of your income should be spent on needs, 30% should be dedicated to wants, and the remaining 20% must be used to create an emergency corpus. The implementation of the 50:30:20 rule will ensure that your financial future is bright.
So, as per the rules, 50% should be dedicated to things such as house rent or EMI, groceries, utilities, and many more. 30% should be spent on things like vacations, movies, and subscriptions to online streaming sites. It is important to save the remaining 20% of your income to build an emergency corpus which is at least thrice in size of your monthly salary.
A more traditional strategy:
This strategy is very different from the 50:30:20 rule. It involves three steps. They are:
- Identifying goals:
Before investing for any purpose be it for retirement or for buying a car, you need to have a clear picture of how much wealth you want to accumulate before retiring from the job market entirely. To identify your financial goal, you can choose to follow the SMART (specific, measurable, attainable, realistic, and time-bound) method. Aiming to accumulate ₹1.2 crores at the time of retirement can be considered a good example of a SMART goal.
- Sorting out priorities:
Once you have identified your goal, now, it is important to prioritize goals. It means deciding on the things you will spend on. For instance, the repayment of a loan or children’s education or saving for retirement should be your priority over taking a vacation.
- Calculate how much to invest:
Once the two steps have been completed, proceed to the third and final step, which is to calculate the monthly investments that need to be made. To determine, you can use a SIP calculator, which can be easily found online. So, for example, as stated earlier, you aim to accumulate ₹1.2 crores when you retire. After adding details such as duration of investments and expected rate of return, you will get the required monthly investments as ₹ 34,799.
After going through the two methods above, you may still be wondering about how much of your monthly income should be invested in mutual funds. The correct answer will be that there is no right or wrong answer in the first place. Your monthly investments should solely be based on your financial goals and the time you require to achieve them.