How Much Money Should You Invest in a Mutual Fund Portfolio?

If you have recently started earning but haven’t yet really started saving regularly, it is better that you start soon. Yes, it is obvious that when you start earning you finally have the liberty to buy what you want, eat what you want and hence spending money feels liberating. But what young earners do not realize is that they need to save now if they want to secure their future financially. Financial planning is the key to successful investing. Yes, saving isn’t enough and if you really want to become financially stable then you need to start investing.

There are two are types of investors majorly – the ones who do not wish to take any risk with their investments and then there are those who like taking added risk to increase their chances of fetching higher rewards. If you are someone who is risk averse, then traditional investments schemes like PPF or bank FDs might be of your interest. These avenues may provide lower interest rates, but returns are usually guaranteed. However, if you are someone who doesn’t mind taking the added risk to potentially earn higher capital gains, you may consider the option of investing in mutual funds.

What is a mutual fund?

Asset Management Companies (AMCs) and fund houses collect money from individuals sharing a common investment objective and invest this capital raised in stocks and other money market instruments like debt, call money, commercial papers, G-sec, etc. This pool of funds raised by AMCs is referred to as a mutual fund. Mutual funds are professionally managed funds where the fund managers buy and sell securities through an applied investment strategy in order to serve the interest of the scheme’s investment objective. The performance of a mutual fund generally depends on the performance of its underlying assets and the sectors and industries in which these assets lie.

How much money should I invest in mutual funds?

Mutual funds are further categorized based on certain attributes like investment objective, asset allocation, fund size, risk profile, etc. There are enough mutual fund schemes to cater to the needs of almost every individual.

However, to identify how much money you need to invest in mutual funds, here are a few things to remember:

·      Financial goal: Depending on whether you have a short term goal or a long term goal, you can decide how much money you need to invest in mutual funds. For example, a long term goal like building a retirement corpus might need you to accumulate an amount worth Rs. 25 to Rs. 30 lakhs. Whereas a short term goal like the wedding will need you to collect an amount worth Rs. 7 to Rs. 10 lakhs. Hence, your financial role plays an integral part in deciding how much money you need to invest in mutual funds.

·      Risk appetite: Understanding your risk appetite is equally essential while investing in mutual funds. That’s because mutual funds like equity funds invest predominantly in equity and equity related instruments, thus making them a high risk investment. Mutual fund investments are exposed to market volatility and returns from these investments are never guaranteed. Hence, it is better to know your risk appetite and invest within your boundaries.

These are the two main things that investors should bear in mind while investing in mutual funds. Also, it is better to align your financial goals with your investment schemes so that reaching that goal becomes a lot easier. Investing in mutual funds isn’t rocket science if you keep these simple things in mind and invest regularly till you meet your goal. But if you are new to investing, it is better to seek the help of a professional advisor.

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