I am 27 years old and earn up to 8 lakh a year. How much should I start investing in mutual funds if I am able to save more than 50% of my salary? Could you please suggest some low-risk funds?

—Pragna Gupta

The general thumb rule for how much a salaried person should invest regularly is that they should invest about a fourth to a third (25-35%) of their income. If you can save and invest more than that, that’s great. However, you should do two things in this regard.

First, make sure you have some surplus amount saved in a contingency fund that can take care of any emergency needs. There are no hard and fast rules about how much this should be, but for a young person such as yourself, a quarter of your annual income should suffice. So, make sure you have about 2 lakh salted away in a safe place (either in your bank savings account or a liquid fund) before you start investing.

Second, make sure that you can sustain the amount of money that you are planning to invest over the long term. If you think that in a year or two, you may not be able to sustain this level (50%) of saving and investing, you should probably shoot for a lower amount and increase it as your income grows, say, annually.

Assuming you have a take-home monthly salary of 50,000 (after taxes) and you are investing 20,000-25,000, you can start investing in view of that your age and low risk tolerance level. I would suggest a 50:50 split between equity and debt. Equity funds Aditya Birla Sunlife Frontline and Parag Parikh Long term, and debt funds HDFC Short term fund and UTI short term income fund will fill out the portfolio well.

My current mutual fund investments (₹60,000 per month) are in equity funds. I am now considering diversifying into debt schemes. Apart from the diversification benefit, I do not have any particular requirement for the money I plan to invest in debt MFs. However, I expect to earn more than 6%. Please suggest an appropriate scheme for me? Also, should I invest a lump sum or should I follow the SIP route?

—Neel Shah

Investors choose the SIP route for two reasons—to reduce the timing risk of investing lump sum in the market, and to match their monthly income cash flow with their investment plan. When it comes to debt funds, only the cash flow matching requirement make sense. Debt funds are not as volatile as equity funds and hence the need for cost-averaging is low. Adding debt funds to a SIP portfolio will have the beneficial effect of lowering the overall portfolio volatility and, hence, it’s a good option.

It’ll be good to stick to the lower-end of the duration curve to avoid interest rate risks. That means, short-term funds such as HDFC short term debt fund and ICICI Short term fund would make good additions to your portfolio. You can add one or both of these funds to your SIP portfolio. If you have a lump sum, you can invest in a single shot as well.

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Srikanth Meenakshi is co-founder and chief operating officer, FundsIndia.com. Queries and views at mintmoney@livemint.com

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