Where to save for the downpayment of a home?
If you have decided how much you need to save for your downpayment, this post will show you where to invest.
If you have decided how much you need to save for your downpayment, this post will show you where to invest.
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.
Related:
This article uses the SMART framework to find your SIP amount for downpayment
Series of articles on 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.
Related:
We will choose between bank deposits (FD/RD), debt and equity mutual funds for this goal.
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.
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.
Choose a debt mutual fund based on the criteria explained in this post: How to choose a debt mutual fund?
Once the goal comes closer to three years, stop investing in the debt fund and switch to RD.
Related: How is tax calculated on selling shares/MFs and how do to do tax harvesting?
Follow the following steps:
Choose mutual funds like this:
After one year has passed,
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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