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Where to save for the downpayment of a home?

04 Dec 2021 - Contact Sayan Sircar

Tags: Choosing Investments ;  Asset Allocation

4 mins read

If you have decided how much you need to save for your downpayment, this post will show you where to invest.

Table of Contents

• Introduction
• How far away is the home purchase?
• Home purchase within three years
• Home purchase within five years
• Home purchase more than five years away

Introduction

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 exactly where to save for this goal.

Series of articles on home purchase:

• How to calculate the SIP amount for the downpayment of your dream home?
• Should you sell your mutual funds to buy a house?
• Goal-based investing: check if you can purchase your dream home
• Where to save for the downpayment of a home? « this article
• Should you stretch to buy your dream home?
• What is the best home loan tenure?

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 investor’s 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:

• What returns should we expect from equity investing?
• What should be the Asset Allocation for your goals?

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 RBI’s 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.

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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.

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?

Home purchase more than five years away

(click to open in a new tab)

Follow the following steps:

• 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
• start a SIP into debt and equity funds in that proportion: How to calculate the SIP amount for the downpayment of your dream home?
• review and rebalance after one year: Portfolio rebalancing during goal-based investing: why, when and how?

Choose mutual funds like this:

• How to choose a debt mutual fund?
• Which index funds to invest in and why?

After one year has passed,

• 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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Topics you will like:

Asset Allocation (18) Basics (5) Behaviour (10) Budgeting (9) Calculator (10) Children (6) Choosing Investments (24) FAQ (2) FIRE (8) Gold (6) House Purchase (10) Insurance (6) Life Stages (2) Loans (10) NPS (3) NRI (3) News (5) Portfolio Construction (27) Portfolio Review (17) Retirement (20) Review (7) Risk (6) Set Goals (24) Step by step (3) Tax (10)

Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself
OR
use this quick and fast online calculator to find out the SIP amount and asset allocation for your goals.

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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

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