How much should you invest in mutual funds? Experts say there’s no magic number

Should you invest 20% of your salary in mutual funds? Or is 30% the ideal number?

It’s a question many first-time investors ask while setting up their first systematic investment plan (SIP). The internet is full of rules of thumb and opinions, that says you should invest a fixed share of every pay cheque. But experts say there is no one-size-fits-all answer.

Start with your goals, not a percentage

While percentage-based rules can help investors begin, financial planners say the better approach is to calculate how much you need for future goals and then work backwards to arrive at the required monthly investment.

“There is no single number that fits everyone. It depends on your goals, timelines and existing obligations. Working backwards from a specific goal is far more useful than picking an arbitrary percentage,” said Rhishabh Garg, CEO of FundsIndia.com.

He recommends saving at least 20% of monthly income initially and gradually increasing it to 30% over time.

“But if you think 20% is a stretch, don’t worry. Start saving whatever seems feasible, and when you have created a habit and are disciplined, you can gradually increase your savings.” Garg said.

Nitin Agrawal, CEO of Mutual Fund by InCred Money, also believes there is no universal thumb rule.

“A good starting point is to invest around 20-30% of monthly take-home income in mutual funds, provided the household has already built an emergency fund and covered essential insurance needs. The exact percentage should be guided by age, income stability, liabilities and financial goals rather than income alone,” he said.

Don’t let your SIP remain the same as your salary grows

Starting a SIP is only the first step. As incomes rise, experts say investments should rise too. Garg recommends increasing mutual fund investments by at least 10% every year.

“Income tends to rise faster than the amount people invest. A useful habit is to step up your investment amount by at least 10% every year. Done consistently, this makes a bigger difference to your final corpus over the long run than most other financial decisions,” he said.

Agrawal pointed to the concept of a step-up SIP, where investors increase their SIP amount annually in line with income growth.

“As income rises, the allocation should ideally rise as well,” he said.

Don’t spend every increment

Higher salaries naturally lead to better lifestyles. But experts caution against allowing every pay raise to be absorbed by higher spending.

“The issue is when all of a raise goes into lifestyle and none into investments. A simple fix is deciding upfront that a portion of every increment, even half, goes towards investments before the rest gets spent,” Garg said.

Agrawal suggested consciously dividing every salary increment between lifestyle upgrades and investments so that living standards improve without compromising long-term wealth creation.

Build an emergency fund before increasing equity investments

Experts also advise households to create a liquidity buffer before increasing allocations to mutual funds, particularly equity-oriented schemes. According to Garg, investors should maintain funds equivalent to around six months of essential expenses in a savings account or liquid fund before directing additional surplus towards long-term investments.

“This protects investors from having to sell equity investments at the wrong time during an emergency,” he said.

Agrawal recommends maintaining three to six months of essential expenses, with a larger buffer for households with variable incomes, dependents or ongoing EMIs.

Common mistakes investors make

According to the experts, deciding how much to invest is only one part of the equation. Investors also need to avoid common pitfalls that can derail long-term wealth creation.

Garg said many investors begin investing without clearly defining their financial goals, making it easier to stop investing during market corrections. Other common mistakes include failing to increase investments as income rises, building investments before creating an emergency fund, and choosing an investment amount based on what friends or colleagues invest instead of their own financial situation.

Agrawal added that many investors start by targeting returns instead of preparing a financial plan. He also highlighted inadequate liquidity, insufficient insurance, reacting to market volatility and allowing lifestyle expenses to grow faster than savings as frequent mistakes.

There may not be a universal percentage that works for every investor, but the experts agree on the broad framework. Begin with an investment amount you can sustain consistently, build an emergency fund before increasing equity exposure, align investments with specific financial goals, and increase your SIPs as your income grows.