What is the ideal amount to invest in Mutual Funds

What is the ideal amount to invest in Mutual Funds

What is the ideal amount to invest in Mutual Funds

Many a time I am receiving a particular query regarding the Ideal amount to invest in Mutual Funds. So, today I have decided to write a blog post on Ideal amount to invest in Mutual Funds.
At the onset, I would like to reiterate that there is nothing so called ideal amount to invest in Mutual Funds. Most crucial part of the investment is making a sound financial planning. I do strongly believe that Mutual fund investments should always be linked to your financial goals or objectives. Various times in my previous blog posts I have mentioned the famous quote i.e.“Failure to plan means planning to failure”

If there is no ideal amount to invest in Mutual Funds, what one should do?

Investment in the mutual fund is only a part of the one’s financial planning. Proper planning and sheer discipline is the main key to success in mutual fund investments.
Therefore before investing in the mutual funds, one should consider the following aspects.

  • Goal Planning: Why to invest in Mutual Funds? You should identify your financial goals.
  • Tenure of investment: When I need the money? You should decide tenure of your goals.
  • Desired Corpus: How much money do I need? Calculate the estimated future cost.
  • Risk appetite: What is my risk-bearing capacity? How much risk can I tolerate? Analyse your risk proposition.
  • Fund selection: Once you have decided the above factors judiciously, now it’s the time to decide where to invest and how to invest.

Now, really its the time for you to take out your pen and paper and start chalking out portfolio mix and selection of fund based on risk profile.
This is very important to know for everyone that one well planned and well-written investment plan need not necessarily work for others. Investment planning should be construed as a unique one for every individual. Like a financial investment plan for an individual who inherited adequate ancestral wealth, will not be same with that of the individual who has just started earning for 2 years or so. Various other decisive factors such as existing financial health, the stability of income, life’s priority, existing financial liability, marital status, number of family dependents, aspirations and last but not the least amount of inherited wealth do play a major role in making a proper financial plan.

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Benefits of investing in Mutual Funds

In financial management, there is one term called Time value of Money.This means the value of Rs 100 received today is not equals to the value of Rs 100 to be received after one year. Similarly, in my opinion, this works for mutual funds as well. Like when NAV of a particular fund is ₹10 and you have ₹100 to invest, you get 10 units only. When NAV is ₹8, you get 12.5 units and when NAV is ₹12, you get 8.33 units. Now just see what amazing thing has happened here. Total investment is ₹300 and total units acquired is 30.83 units. So average cost becomes ₹9.73 per unit. This thing is called Rupee cost averaging. The more you remain invested, the more Compounding factors work.

This thing does not happen for fixed interest bearing instruments like PPF, NSC, KVP, Bank Fixed Deposits and etc. Apart from fixed interests earned from these instruments, the value of ₹100 is at PAR with the cost of investment after one year i.e. cost of investment remains same after one year. No mechanism of rupee cost averaging works here. On the other hand, there is a likelihood of lower or lesser cost of investments (Lower average cost per unit acquired ) in mutual funds if the holding period is reasonably high.
Investment in a mutual fund can be done either through SIP or Lumpsum amounts. Some people even think SIP as an investment product but actually, this is not a product but a medium or vehicle of investment. SIP is best suitable for salaried class employees. Those who cannot afford the pain of direct equity, investment in indirect equity through mutual fund route has been gaining popularity over last 4 to 5 years. Ideally, an individual should invest 20% to 30% of net take home pay or income to build a sizeable corpus. Also one should keep in mind the 70:30 equity debt ratio. If 70% investment is made in equities, 30% must be in debt instruments. Remember the great quote of Investment Guru Sir Warren Buffett that never put all your eggs in one basket.
Now, let’s just take an example for better understanding. Monthly investment amount say ₹ 1000/- for 3,5,10,15,20, 25 and 30 years respectively. The desired rate of return or CAGR is considered as 12% per annum.

Thus, you can see that with just mere ₹1000 monthly SIP you can build a sizeable corpus of around ₹10 Lakh and ₹35.29 Lakh for 20 years and 30 years respectively.

Final Word on Ideal amount to invest in Mutual Funds

To conclude I would add one more time that there is nothing so called Ideal amount to invest in Mutual Funds. Rather it depends on various factors already mentioned above. You can also comment below if you like this post or have any query regarding this.

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