Dear Investor, How much money should you invest in mutual funds?

By Mayank Bhatnagar

The mutual fund industry is full of generalized rules of thumb – some say you should invest 30% of your income. Others recommend you start with Rs. 100 per month and increase it as you grow. Still, others advise you to set aside whatever is left at the end of the month after settling your monthly expenses.

Unfortunately, all these generalized suggestions are a very poor way to start your mutual fund investing journey!

Also read: Which mutual fund is suitable to start your first SIP?

Without a doubt, among all the available asset classes, mutual funds are the best way to invest for your long-term goals. After all, they are structured as a trust; Your money is safe, strictly regulated, transparently managed, one of the lowest cost and with over 3000 plans available, it can be customized to your specific needs. What other asset class can claim all of the above?

Apart from the above, mutual funds have the potential to beat inflation by a factor of 2-3x returns over the long term on a post-tax basis. This is something most investment asset classes will never get anywhere near.

100% of your long-term portfolio (5 years+) can and should be allocated to equity mutual funds. The problem is that you have to understand the risk and reward before you invest and start by setting the right expectations right away, otherwise your journey will go off the rails very quickly!

Once you have decided where to invest, the next step is to figure out how much you need to invest. Don’t fall into the trap of investing arbitrary amounts! These ad-hoc investments will lack flexibility and serve no real purpose. It is extremely important to invest according to a set plan, which includes relevant and clearly defined goals.

The best way to calculate how much you need to invest in mutual funds will be according to your financial goals. Some of the top goals for which our clients save include their retirement, children’s education or wedding expenses, prepayment of home loan, setting up an emergency fund, or even a down payment for a new vehicle. To do involves saving.

A qualified investment specialist can help you define these goals, prioritize them, and incorporate inflation into the equation so that the target amount can help you meet your stated objectives when the date comes. For example, an MBA degree that costs Rs. 10 lakh today will probably require between 32-35 lakh in the year 2040, assuming standard 7-8% inflation as the cost of education in India continues to rise.

The good news is that since you have time, even a monthly SIP of Rs. ₹4,000 can help you achieve this goal if invested in the right fund.

Once you have identified your objective and the amount required to accomplish the goal in the future, you will find that this scientific approach now allows you to quickly find out the amount required to accomplish these important goals .

It often happens that this amount is larger than the amount you want to set aside given your financial situation today. This is where goal prioritization comes in and gives you the option to start with your highest priority goal and then gradually increase your investments to meet your other goals over the next few years, as your income increases. The power of taking disciplined action can be quite incredible!

Although the above process can help you start investing the right way, it is important to remember that it is important to stay invested.

One must ensure that the amount invested for the goals is not used to finance extravagant lifestyle expenses. Your goal-based investments must be sacred – only an absolute emergency can force you to break out the proverbial piggy bank!

Market noise and sensationalist headlines will not motivate you to time the market. Most importantly, do not start chasing returns based on comparison with others’ investments.

Make sure you get expert help, not only to identify your goals and the calculations around them, but also so that professionals can help you stay invested despite market volatility. Flexibility is the key to becoming a successful investor! Getting started is easy, staying invested and making money are completely different tasks.

-The author is Co-Founder and COO, FinEdge. The views expressed are personal.

Disclaimer: The views and investment suggestions of the experts in this report of News18.com are their own and not those of the website or its management. Readers are advised to check with certified experts before taking any investment decision.