Mutual funds are fast gaining popularity among investors, especially considering the frequent addition of newer fund varieties in the market. With commonly available options like equity, debt and hybrid funds, mutual funds cater to a range of investor categories, from the risk-taking to the risk-averse. Investors can select schemes as per their investment goals and also investment time horizon, apart from risk/return preferences. These also offer a great amount of flexibility with the choice of fund, timing of investment, and also the exit of investment.
Most investors who are starting off with mutual fund investments often wonder about the right amount to be invested in these. Here, we will address this query of investors and also discuss some of the factors that can influence the investment amount decision.
Is there an ideal amount to invest in mutual funds?
Many factors influence the decision on the ideal amount that an investor must invest in mutual fund schemes. Some of these include personal investment objectives, monthly income and expenses, investment time horizon, and risk-taking ability.
Personal investment objectives/goals
Let’s say, an investor wants to create a corpus for children’s higher education, which may cost approximately Rs. 50 lakhs. For this, he/she can start an SIP of Rs. 5,000 per month if the selected fund offers an annualised return of 12%. While mutual fund returns are not guaranteed, an investor can take the average returns into consideration while deciding on the targeted corpus and the corresponding investment amount.
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Monthly income and expenses
While deciding on the ideal mutual fund investment amount, one must consider the monthly inflow and outflow of funds. This helps in the better planning of investment. investors can follow the 50:30:20 rule of budgeting. This rule suggests that an investor should set aside 50% of his/her income for basic needs, including rent payments, groceries, etc which are essential for maintaining a personal lifestyle. 30% of an individual’s income should be set aside for additional wants like vacations, purchasing a vehicle, buying luxury goods, dining, etc. The remaining 20% of one’s income should go towards meeting financial goals. Once an investor knows the approximate amount available with him/her for investment purposes, it becomes easier to allocate a portion to mutual fund investments with an objective to attain a well-diversified portfolio.
Investment time horizon
Mutual funds may provide good results if investors invest the right amount and stay invested in them for a longer duration. Therefore, an investor must decide on the right SIP or lump sum amount such that it allows his/her to remain invested for a prolonged duration for maximising returns without affecting the personal financial situation. For investors who want to invest in short-term fund options, debt funds could be an ideal choice, specifically overnight or liquid funds.
New investors who are exploring mutual funds for the first time and want to curb their overall portfolio risk can opt for small investments through SIPs. This, however, depends on one’s risk-taking ability as many investors may prefer to invest a lump-sum amount for fetching higher returns from available finances.
What is the minimum investment amount required in a mutual fund?
Most investors who are starting off their mutual fund investment journey tend to believe that these require large sums of investment. This is a misconception, since the minimum amount required will depend on the fund chosen. Asset Management Companies (AMCs), depending on the mutual fund scheme, decide the minimum investment amount required in the fund. In most cases, this could range between Rs. 500 to Rs. 5,000. In order to attract more investors, many AMCs allow a minimum investment as low as Rs. 100, especially in case of some domestic mutual funds.
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SIP or lump sum
The two primary modes of investing in mutual funds are Systematic Investment Plan (SIP) and lump sum. SIP involves small amounts of periodic investments which are mostly fixed throughout a predetermined investment tenure. A lump-sum investment is a one-time investment in a chosen mutual fund scheme.
Both SIP and lump sum investments have advantages and disadvantages. However, in the case of SIP mode, investors can invest the lowest permissible amount in a selected fund. The minimum amount in SIPs could range between Rs. 100 – Rs. 500. The intervals of investment can also be decided by the investor. The minimum amount required in a lump sum investment could range between Rs. 1,000 – Rs. 10,000 depending on the scheme.
Before starting any mutual fund investment, it is very important for investors to assess personal financial requirements, identify personal risk profile, and estimate the investment horizon. These factors put together will primarily allow an investor to select an ideal investment amount such that it maximises returns.
Investors who are just starting off with mutual fund investments can opt for low-risk fund options, such as debt funds or fixed income funds.
SIP or systematic investment plan allows investors to invest small periodic portions in mutual fund schemes. This imbibes financial discipline and helps fetch better returns in the long run. Lumpsum investment is ideal for investors who want to park large sums in a fund, especially for the long term.
Since mutual funds invest in different securities depending on the fund objective and category, there are chances of a reduction in investment value. Equity funds are mostly exposed to the market fluctuations and are therefore susceptible to constant ups and downs in their value.
Beginner investors can download the Fisdom app on their smartphones to start their mutual fund investment journey. The app allows access to a wide array of fund options that can be selected as per risk-return preferences and investment horizon.
Since equity funds invest in equities and are actively managed by fund managers, these have higher chances of fetching higher returns as compared to debt and hybrid funds. However, these also carry comparatively higher risks.