The question of how much of income should be allocated to mutual funds (MFs) investments has been long debated. While conventional wisdom once leaned heavily towards fixed deposits and physical assets, the rise of mutual funds has opened a wider spectrum of possibilities. Today, the decision hinges not only on how much one earns, but also on financial responsibilities, risk appetite, and long-term aspirations.
It is usually recommended to set aside 25–35 per cent of investable surplus for mutual funds. Yet, rigid percentages can be misleading. For most families, the weight of school tuition, healthcare costs, and monthly mortgage payments leaves little breathing room. Without some reshuffling of priorities, carving out a slice of income for investments can feel near impossible.
Financial planners say the first step is to get a full, unvarnished view of one’s money flow. That means adding up every source of monthly income salary, business earnings, rental proceeds, even irregular bonuses before putting pen to paper on any investment plan. From that figure, the essentials are stripped out: housing costs, electricity and water bills, insurance premiums, outstanding loan instalments. After deducting the surplus, the remaining amount is the actual pool where mutual fund investments can be made or other savings can be made.
Take the case of someone who is paid Rs 50,000 a month as an example. A fixed expenditure of Rs 30,000 leaves Rs 20,000 for savings and investment. This simplicity is important. Without the surplus, any percentage advice is theoretical.
How do investment goals influence the percentage?
Mutual fund contributions must align with clearly defined objectives. Goals may be short-term (a year-long horizon, such as a vacation), medium-term (five years, like a house down payment), or long-term (over 15 years, such as retirement). The investment mix and consequently the percentage of income channelled into funds depends on these timelines.
For example, someone saving for a home in five years may lean on balanced or hybrid funds to temper volatility. On the other hand, a 30-year retirement time horizon can afford greater exposure to equity funds, which in the long term have produced higher inflation-adjusted returns.
Emotional and financial risk tolerance is a primary consideration in deciding how much to invest.
An investor with low tolerance who over-invests in high-volatility equity funds can panic-sell during market declines. On the other hand, a high-tolerance investor in extremely conservative vehicles can miss long-term wealth goals.
Professional fund houses reveal risks that include market volatility, credit defaults, and liquidity strain. Yet understanding gaps inevitably cause investors to overestimate or underestimate their comfort levels. A conservative strategy is to match fund categories with personal tolerance for temporary losses.
Impact Of Financial Dependents
The number of dependents also directly impacts disposable income. A person with school-going children and elderly parents will inevitably have to set aside more for regular expenses. This lowers the share available for high-risk, long-term investments.
Consider the example of a person who has a monthly salary of Rs 80,000 with heavy household and medical expenses. Instead of diverting the entire Rs 10,000 surplus into equities, a split between balanced funds for growth and liquid funds for short-term access ensures both stability and progress towards goals.
How does life stage determine investment mix?
Younger investors generally have the advantage of time to absorb market cycles. They can invest a bigger chunk of their earnings into equity-based funds, even 30 per cent or more. But those who are close to retirement tend to focus on preserving capital and stable income flows, moving over to debt and conservative hybrids.
Illustratively, a 25-year-old with no dependents might commit a third of their salary to small-cap and flexi-cap funds. By contrast, someone at 58 may direct 70 per cent of their mutual fund portfolio to short-duration debt funds, minimising volatility risk.
Benchmark rule for allocation
Many planners reference the 50/30/20 framework half the income for necessities, 30 per cent for discretionary spending, and 20 per cent for savings and investments. Within this 20 per cent, mutual funds can form a substantial share, adjusted for emergency reserves and other savings vehicles.
This is not prescriptive. Market conditions, personal obligations, and upcoming expenses may require deviations. The principle remains: sustain consistent contributions without jeopardising financial security.
