Optimal Mutual Fund Allocation for Salaried Individuals

Off late we have been receiving several queries from our investors regarding the ideal amount a salaried individual should typically invest each month. While this depends on several components, there is certainly a way to arrive at this number. In this article, I will attempt to breakdown the process and elaborate upon the factors that will determine the amount you can allocate to investing. Read On!

Typically, your income can be used for 3 main purposes namely, expenditures, building an emergency fund and investing in your long term goals.

 The general rule is that if you are able to invest about 40% of your income, then around 20% of this must go towards investing. Now deciding upon the exact amount for monthly SIP  plans can be difficult, as you may or may not be able to change the stipulated rate later due to an alteration in priorities. So before you  fix the value of an investment, keep in mind the following factors:

FOIR

Fixed obligations to income ratio must be determined before setting aside a portion of monthly salary for SIP payments, as these expenses are necessary for meeting the basic requirements of sustaining an individual’s life. 

Let me demonstrate this with an example. Suppose Monika has a monthly income of Rs. 50,000. Her expenses can be listed as follows:

Rent = Rs. 10,000

Electricity Bill = Rs. 5,000

Food and other utilities = Rs. 5,000

Total Expenses/FOIR = Rs. (10,000+5,000+5,000) = Rs. 20,000

This represents the total FOIR of Monika.

Total income available for investments = Total income – FOIR = Rs. (50,000-20,000)  = Rs. 30,000

Thus, Monika can decide upon any amount up to Rs. 30,000 for SIP investment scheme. 

Ideally, a lower FOIR implies a relatively higher value of investments can be undertaken in mutual funds, and vice versa. 

Precautionary Withholding Of Funds

Out of remaining income left with an individual for investment purposes, which can be calculated by deducting FOIR from monthly salary, a portion of this money has to be withheld by individuals to meet any unforeseen expenses. Precautionary funds need to be maintained during times of emergency.

Resources for this purpose can be kept in savings accounts or cash form with an individual. However, a wiser move would be to keep your emergency corpus in liquid funds. As the name suggests, these funds offer high liquidity with instant redemption facility offered by most of them.

This makes your emergency fund easily accessible to you at the time of need. It also offers a greater appreciation of the deposited amount, to the tune of 6-7%, compared to a savings account which will typically fetch you 2% returns.  Accommodation for this purpose has to be done before looking into the SIP plans available for long term investing.  

Long Term Goals

Investment in a SIP plan should be in tune with the financial goals of an individual. The corpus you would like to accumulate for your long term goal, the time horizon, as well as your choice of funds, also have a bearing on your SIP amount.

You can arrive at the amount you would like retirement or children’s education, as well as the funds you choose, whether they are aggressive growth funds or debt funds, will determine your SIP amount. The total amount of SIP investment should be carefully analyzed depending upon the income and expectations from the stock market. 

Conclusion

Saving a small portion of your monthly income goes a long way into future wealth creation. Investing is more about persistence and consistency rather than a one-time thing. As your income increases, proportionally increase the amount towards your investments for accelerated wealth creation. 

Happy Investing! 

Disclaimer: The views expressed in this post are that of the author and not those of Groww