A home purchase is one of the most important financial decisions of your life. Assuming you can afford the EMI and know precisely how much to save for the downpayment, this post will show you where to save for this goal.
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How far away is the home purchase?
Apart from the downpayment amount, this is the most critical factor determining the type of investments you can choose. As we have shown before, investing in only equity via SIP for periods less than ten years will likely lead to loss of principal. We will follow the standard asset allocation rule for this goal based on the investorās risk profile - Do not invest in mutual funds before doing this
Depending on how much risk you want to take and how flexible your target corpus is, you need to choose your investments. For example, suppose you target a particular amount (say you have already decided on the property and the price is fixed). In that case, you need to invest more conservatively using debt instruments so that there is little risk of not reaching the target. Otherwise, you can invest more in equity to get higher returns at the cost of more variability in the final corpus amount.
We will choose between bank deposits (FD/RD), debt and equity mutual funds for this goal.
Home purchase within three years
Invest the amount monthly via a recurring deposit in either safe banks (as per RBIās SIFI list like SBI/HDFC/ICICI) or via the post office.
We are choosing a bank deposit instead of debt mutual funds since before three years, FD/RD gives predictable returns and has the same taxation as debt mutual funds.
Home purchase within five years
If the goal is more than three years away, we benefit from indexation, which gives us a higher post-tax return (compared to FD/RD) in debt mutual funds.
based on the time left, choose the asset allocation of debt and equity from the above table
invest the lump sum amount you have in the same proportion. The debt amount should be invested immediately, and the equity portion split over a few months
recalculate the downpayment amount in case home prices have increased
find out your new equity to debt allocation mix from the table
check the accumulated corpus and buy/sell the equity and debt portions to meet the new allocation
create a new SIP with the new equity to debt proportion
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This article shows how a very typical salaried couple with one child can invest for future goals using the Arthgyaan goal-based investing tool.
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This post titled Where to save for the downpayment of a home? first appeared on 04 Dec 2021 at https://arthgyaan.com
