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What happens to your mutual fund portfolio final value if you choose to buy a house?

Posted on 08 May 2024
Author: Sayan Sircar

Tags: House Purchase ; Mutual Funds

4 mins read
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This article shows how to understand the impact on your portfolio if you stop investing for a few years between today and retirement to buy a house.

What happens to your mutual fund portfolio final value if you choose to buy a house?

📚 Topics covered:

Don’t Buy a House, Invest in Mutual Funds via SIP
How to Measure Changes in Your Investment Portfolio?
What is the Impact of Buying a House?
Timing Your House Purchase

Don’t Buy a House, Invest in Mutual Funds via SIP

This is a common advice you’ll hear often on social media platforms like YouTube, Twitter/X, Facebook, and Instagram. Your friends and colleagues might suggest the same. Many advocate that investing in mutual funds rather than real estate is better for wealth accumulation. They might be promoting the best mutual funds or teaching investment strategies. Conversely, real estate advocates favor property investment.

It’s well-known that pausing or reducing your mutual fund contributions during your career can impact your final savings. The critical question is:

How significant is this impact if you interrupt your investments to purchase a home?

This article explores the answers to that question.

How to Measure Changes in Your Investment Portfolio?

We’ll apply the framework described here: How much lower is your portfolio value if you pause investments for a few years?

Year	Yearly Investment (without break)	Yearly Investment (with break)
1	5.00	5.00
2	5.50	5.50
3	6.05	6.05
4	6.66	6.66
5	7.32	7.32
6	8.05	House EMI
7-14	8.86-17.26	House EMI
15	18.99	House EMI
16	20.89	20.89
17-20	22.97-30.58	22.97-30.58
21	and	so on

By the end of a 30-year period, marked as ‘House EMI’ years in the table, we’ll examine the impact on your portfolio.

We assume an investor:

Invests monthly, increasing the yearly investment by 10%.
Earns an average post-tax return of 10% annually.
Pauses investments for 1 to 15 years.

The differences in portfolio values are shown in the table, highlighting the effects of investment pauses.

Impact On Your Portfolio If You Stop Investing For A Few Years Between Today And Retirement

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Also read
What are the rolling returns of SIP and lump sum of direct mutual funds? (July 2024 edition)

What is the Impact of Buying a House?

The final portfolio value varies little with the timing of the house purchase. Regardless of when you buy during your earning years, the impact remains relatively consistent. However, the longer the investment pause, the smaller your final portfolio. It’s advisable to repay the loan quickly to minimize this effect.

Impact on final portfolio value when investments are stopped in the middle

To understand what is the right time to buy your first house:

Timing Your House Purchase

Questions often arise about the best time to buy a house:

Should it be early, mid, or late in your career?
How does the timing affect your retirement plans?

The timing of your house purchase surprisingly has minimal impact on your final portfolio, as income tends to increase over time. Thus, you could afford a more valuable home later in your career. An argument could be made for purchasing at retirement, but consider:

You will pay rent until then.
Your investment in SIPs might be lower due to rental expenses.

In conclusion, buy a house when it suits you best:

For under-construction properties, see: How to Buy Your Dream Home Without Any Savings: A Step-by-Step Guide
For ready-to-move houses, refer to: Should you withdraw from your EPF to buy a house?

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