How Much Should You Save Before Investing In Mutual Funds?

Mutual funds are very popular among young investors. They have the potential for good returns, are liquid, are professionally managed, and moreover, they are an affordable way to grow one’s wealth.
Sep 2022
3 mins read

So, how much do you need to save before you can invest in a mutual fund scheme?

Ask different investors this question, and you might get different answers. However, the reality is, you do not need to save up a fortune to invest in mutual fund schemes. You can start with as little as Rs. 500 or Rs. 1000 by choosing a Systematic Investment Plan (SIP) mode of investment.

Mutual Fund SIPs
Systematic Investment Plans (SIPs) are a simple way to invest in mutual fund schemes. Under a SIP plan, you can invest in instalments every month for a specified time and create a corpus.

Optimal Savings For Mutual Fund Investments
While Rs. 500 or Rs. 1000 is sufficient to start your mutual fund investment, you should ensure that your savings help you create an optimal corpus for your financial goals.

Here are some tips to ensure this:

Identify your goals and quantify them
The first step before making mutual fund investments is identifying your personal finance goals. List down all your short-term and long-term goals and then quantify them – which simply means you should assess the corpus required for meeting the goal. For example, if you want to send your child abroad for higher education, you need to figure out the total funds required for this purpose. Quantification of all goals helps you assess the total corpus you need to accumulate and is the first step to planning your investments.

Pro tip: Keep inflation in mind when quantifying goals. The cost of fulfilling your goals may increase with time, therefore inflation adjust the corpus that you need to create so that you can save optimally.

Assess your risk profile and choose suitable mutual fund schemes
Different types of mutual funds have different risk profiles. So before you invest, you need to assess your risk profile and then choose suitable schemes based on it. The return potential of mutual fund schemes depends on their risk. High-risk funds have a high return potential while low-risk ones have low return potential. So, the choice of schemes would determine the average returns that you can expect from them. This will help you work out the savings needed to fulfil your goals.

Pro tip: Equity mutual funds can give good returns on investment over a long-term horizon. So, even if you are risk-averse, it may benefit you to expose a part of your portfolio, however small, to equity mutual funds. When you have age on your side, equity investments can help you create a substantial corpus. However, since they possess a level of risk, do consult your financial advisor before you make this decision.

Estimate time horizon and calculate the savings
The last step is estimating the time horizon of your investments. This must align with your goals and so, you need to assess the tenure available for creating the desired corpus. Based on this, you can calculate how much savings is needed to invest in a mutual fund and create the desired corpus. For example, say you need a corpus of Rs. 1 crore to fund your child’s higher education. If your child is 3 years old and you need the corpus when the child reaches 18 years of age, you have an investment tenure of 15 years. If you invest in a mutual fund scheme with an average CAGR of 12%, you would have to save and invest at least Rs. 20,000 every month to build up the desired corpus.

Pro tip: Always plan for your goals early on so that you have a long-term investment horizon. With long-term investing, compounding of mutual fund returns will help you accumulate a considerable corpus.

Saving for mutual fund investment - the 50:30:20 rule

There is yet another way to figure out an optimal level of savings.
  • 50% of your income should go towards necessary expenses
  • 30% of your income can go towards discretionary expenses, that are not really necessary
  • 20% of your income should go into savings
If you follow this rule and save 20% of your income every month, you can invest a part or all of it into mutual fund schemes. So, from an income of Rs. 1 lakh per month, it is recommended to save at least Rs. 20,000 which can be allocated partially or fully to different types of mutual funds.

The Bottom Line
Mutual fund investments are generally affordable. A saving of Rs. 500 or Rs. 1000 is sufficient to start your mutual fund journey. However, to ensure that your savings match your financial goals, it is advisable to assess the funds needed and save accordingly. Use the pro tips for optimal savings to build up a diversified mutual fund portfolio. You can also use online goal-based calculators to calculate the savings needed for mutual fund investments.

Be disciplined with your investments so that your financial plan stays on track. Consult with your financial advisor when starting your mutual fund journey or when reviewing an existing portfolio. This can help you create a suitable portfolio that matches your investment style.


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