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How Much Of Your Salary Should Go Into Mutual Fund Investments?

Most of us grapple with the big question – how much % of our salary should we save and how much of it should we invest into? However, there is no thumb rule or a fixed mantra for this (I really wish that there was). How much of your salary should go into your SIP entirely depends on your goals or the future expenses that you want to plan for. We would like to illustrate this by using some personas.

PERSONA 1 (Details in the table)

NameHari Krishnan
Age25
Salary (per month)INR 40,000
Family DetailsUnmarried. Plans to get married in the next 2 years
Plans for future (Expected Expenses)Wedding Expenses – 10 lakhs
Education Expense for kids – 30 lakhs
(Above expenses are according to the current level of expenses)
Total expected expenses = 40 lakhs
InflationInflation = 6%Educational Inflation = 12%

Hari has lifestyle expenses which include rent, food, clothing, etc., which would add up to 30% of his salary, which would be Rs 13,500. Also, he has taken a vehicle loan for purchasing a car for his parents and contributes 10% of his income to the EMI/loan repayment, which would be Rs 4500.

The expenses that are foreseeable in the future are education and wedding expenses. Assuming the inflation rates as mentioned in the above table, the expenses would be as follows:

ExpensesRate and Corpus requiredNumber of years
Wedding Expenses – Economy Inflation 6%
Marriage expenses                                    11,91,016 3
Educational Inflation11%
Education Expenses                                2,41,86,935 20
                            4,07,56,391 

As the wedding expenses are due in a shorter time frame, he can invest in short term debt funds which offer an average return of 9% per annum, which would beat the inflation of 6% and offer him better returns than the fixed deposits in a financial institution.

For education, which is investing for a longer time frame, he can cultivate a discipline of saving every month to keep up with the constantly evolving dreams of a child and to have enough corpus to fulfil the dreams of his child, how much of his salary should he invest into a mutual fund? 

Follow the calculations in the following table. A regular Equity Mutual Fund promises a return of 12-15%. Taking an average to be 13.5% –

Monthly Saving                                          19,702 
Expected Return13.5%
Time period20
Maturity Amount (As calculated in the above table)                                2,41,86,935 

Hence, Hari would have to save Rs 19,700 of his salary into an equity mutual fund to create a corpus of Rs 2.41 Cr for his child’s education. He would be still left with Rs 7000 after excluding his lifestyle expenses and his investments.

As a parent, we should start as early as possible to ensure that we do not burden our child in a mountain of interest payments and principal payments from his or her educational loans. It is our responsibility as a parent to provide a stress-free and debt-free life to our child.

NameRajat Bhattacharya
Age45
Salary (per month)INR 70,000
INR 50,000 (Wife’s Income)
Net Family Income = INR 1,20,000
Family DetailsMarried with two children (Ages 12,15)
Plans for future (Expected Expenses)Children Wedding Expenses – 20 lakhs per child
Education Expense for kids – 30 lakhs per child
(Above expenses are according to current level of expenses)
Total expected expenses = 100 lakhs
InflationInflation = 6%
Educational Inflation = 12%

PERSONA 2 (Details in the table)

The following could be the monthly inflows and outflows of the family –

Salary120000
[-] Lifestyle expenses (Food, rent, clothes, celebrations, travel etc) 40% of Salary48000
[-] EMI (Loan payment) (6% of Salary)6000
[-] Invest for Future expenses??

The future expenses can be detailed as follows –

ExpensesRate and Corpus requiredNumber of years
Wedding Expenses – Economy Inflation 6%
Marriage expenses85,31,713 13
Educational Inflation11%
Education Expenses1,38,27,227 8
Total Corpus Required
                                                                2,23,58,940 

Assuming that Rajat invests in an Equity Mutual fund for the long term expenses of the wedding and education of his children, which earn a return of 12%-15% per annum. How much would his family have to save to ensure that they have a large enough corpus to cushion the future of their children?

Monthly Saving62,067 
Expected Return13.5%
Time period12
Maturity Amount (As calculated in the above table)2,23,58,940 

In both the personas, the estimated returns offer a higher benefit and enable a smooth sailing journey to reach your destinations. 

Start early and reap the benefits of compounding. Also, do not shy away from equity markets. Index funds and other mutual funds charge a premium to manage your money to offer you a promised return. They can be considered as one of the best financial products for long-term investing to reach your milestones in life.

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