Mutual Funds: How can you build a decent corpus despite a modest salary?

A modest salary doesn’t condemn you to a lifetime of financial struggle with savings and investments. While investing with limited income demands careful planning and smart strategies, it is entirely feasible.

Abeer Ray
Published19 Jun 2024, 01:27 PM IST
Start slow and then see your money grow.
Start slow and then see your money grow.(Pixabay)

Employers are eager to offer high salaries or generous appraisals to recognize their employees’ performance. While this reality may be harsh, determining how much to save and invest from one’s modest earnings can feel overwhelming.

Nevertheless, the encouraging news is that even modest sums can accumulate significantly over time, and there are effective strategies to simplify the process of saving. Here are some tips to help you begin:

Begin modestly: There’s no need to feel compelled to set aside a large portion of your paycheck immediately. Start with a manageable sum, whether it’s just 5% or 10%. Over time, you can incrementally raise this percentage as you become more accustomed to saving.

Automate your savings: Arrange for automatic transfers from your checking account to your savings account each payday. This method ensures you prioritize saving and reduces the temptation to spend the money elsewhere.

Monitor your spending: Understanding your expenditure patterns is crucial for identifying areas where you can reduce costs. Numerous budgeting apps and tools are accessible to assist you in this task.

Distinguish between necessities and desires: Prioritize essential expenses such as rent, groceries, and utilities. Then, be mindful of discretionary spending on luxuries such as dining out or spontaneous purchases.

Investigate affordable investment opportunities: Explore investment avenues that require minimal initial investments, such as fractional shares or robo-advisors. These options enable you to commence investing with smaller sums of money.

Achieving substantial wealth with a modest income is entirely feasible. Although it may appear challenging at first, the fundamental principles remain applicable. Yet, your ambition must align with your determination and strategy.

How can you reach your financial objectives?

This question appears straightforward but lacks a singular or easy answer. Determining how much to save and invest is not straightforward, especially with inflation eroding a significant portion of your income.

Consider the following example to illustrate this point. Beginning with a 5% investment of your income is an excellent starting point. It’s a manageable figure that helps establish a consistent habit of saving and investing.

While you might be tempted to begin with a larger sum, delaying until you’ve accumulated a substantial amount before investing could mean missing out on the advantages of starting early in life. Starting with 5% is a feasible percentage for most budgets, even with limited income. It’s less likely to make you feel deprived and more likely to foster long-term commitment.

Then, choose an equity mutual fund to invest in. In youth, there’s often a willingness to take risks. You might be tempted to begin with a thematic fund without fully considering its volatility. Instead, consider starting with a large-cap fund, such as a blue-chip mutual fund. 

Investing a portion of your savings in these funds can establish a strong base for building wealth, particularly for those starting with limited investment capital or with a lower risk appetite. Blue-chip companies have a proven track record of financial stability and success, offering more predictable returns compared to riskier alternatives.

Name of the fund

Type of fund

SIP investment 

(in Rs)

Investment tenure 

(in years)

10-year returns 

(in %)

Invested amount 

(in Rs)

Estimated returns

(in Rs)

Total value of returns 

(in Rs)

 

Nippon India Large Cap Fund

Blue-chip fund

2,500

30

16.91

9,00,000

2,66,43,833

2,75,43,833

Invesco India Largecap Fund

Blue-chip fund

2,500

30

16.25

9,00,000

2,26,31,433

2,35,31,433

ICICI Prudential Bluechip Fund

Blue-chip fund

2,500

30

15.92

9,00,000

2,08,60,047

2,17,60,047

Kotak Bluechip Fund

Blue-chip fund

2,500

30

15.84

9,00,000

2,04,52,112

2,13,52,112

Source: AMFI (As of June 19, 2024)

Your salary will vary over time. Job changes or annual appraisals often result in raises, providing opportunities to increase your income. You can use this additional money to enhance your investments or explore alternative investment opportunities.

If you choose to increase your investments by 5% annually, and even if you achieve just the minimum 12% return typical of underperforming mutual funds in the long term, you could potentially accumulate 1,11,90,349. Over 30 years, this strategy could grow your total to 1,31,83,515.

Above all, resist becoming accustomed to the raise. Guard against lifestyle inflation, where you raise your spending in line with your increased income. This could diminish the potential advantages of the raise.
 

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First Published:19 Jun 2024, 01:27 PM IST
HomeMutual FundsMutual Funds: How can you build a decent corpus despite a modest salary?

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