Want to buy a house? Invest in these funds: Dhirendra Kumar, Value Research

Dhirendra Kumar, CEO, Value Research, names the funds to go for if you want raise the down payment corpus for buying the house that you fancy.

Edited excerpts:

When one talks about buying a house, it is really not about the finance that he gets from banks. The biggest challenge is how he collects the corpus for that chunky down payment. Do you think equities can be a right route and SIPs the best way to go about it?

Undoubtedly, SIP and regular investing in equity is the simplest way of converting your cash flows into capital. You should have sizable capital and should be able to derisk home buying by making your down payment to the extent that ensures your future cash flow by way of EMIs are not large enough to disrupt your monthly budget. It could be 20%, 25% or 30%.

So you should be patiently waiting and accumulating your savings so that you can make a reasonable down payment.

Many investor stell me that once the EMIs start, they are not very comfortable with carrying a big debt and they want to prepay it. In fact, home loan is the only thing is the only borrowing which justifies itself because if you borrow for buying a home, for 10-15 years, the amount of return that you derive from equity generally tends to be much higher than the interest that you incur on your home loan.

So, if you have to borrow, this is the only borrowing you should do in your life. No other borrowing for any consumer loan or credit card loan should be considered.

How should one go about it? I know you are saying consider multicap or balance funds for the long term so you are essentially saying start with a Systematic Investment Plan (SIP) in those kind of funds and then look at financing the money invested there for buying a home?

It depends. You need time for all this and you should definitely earmark a time — whether it is less than five years or more than five years. Keep it simple, choose one or two funds if you plan to buy your house within next five years. Invest with a conservative vehicle where you are likely to get return which will be higher than what recurring deposit will get you. It will also come in a manner that will have some upside if you get lucky with the equity market.

Averaging will definitely help because Indian markets are bound to remain very volatile at all times in future. Volatility and regular investing comes as a great advantage for individual investors. If you are planning to buy your house within next five years, accumulate. It is a negotiable goal because buying a house is not plan which has to happen on a specific date. It has to happen within a time frame.

If you want to buy your house within next 3-5 years, go for equity savings funds. I will recommend three equity savings funds– the Edelweiss Equity Saving, The Axis Tax Saver and DHFL Pramerica Equity.

If you are planning to buy your house five years from now, go for the usual multicaps.

Five years and more, you just might get lucky with the equity investments. That way you will be able to accumulate the 20-25% needed for the down payment much ahead of time. There is nothing better than actualising your goal much ahead of what you had planned for.

Coming to those multicap funds as of now — SBI Magnum Multicap, Franklin India Focussed Equity and UTI Equity are my choice.

That is for the early planners but what about the late bloomers? Someone who has already got a home loan running and now decides that there is no other asset class which is giving you money and why dont not I put some corpus into SIPs and perhaps that can help me sail through the rest of my home loan. Do SIPs for home loans have to be done way before actually taking up the home loan?

There are two-three points to consider. First, you need to accumulate for your down payment. I have given a plan. There are people who ask question that they have a home loan and they want to prepay it. Should they run a SIP and accumulate the savings in a manner and then prepay it?

Do not think in terms of prepaying your home loan. Rather, take a home loan-linked term plan, so that you are able to derisk your family from any such situation and carry on with your SIPs. Save as much as you can in an equity fund for the long term because it does not make sense for anybody to be prepaying their home loan simply because the cost that you incur by way of interest and the tax break that you get on repayment of the principal and the interest on home loan is much lower and the benefit from that outweigh the benefit that you will derive from prepaying it.

The return on a 10-15 years time frame on your equity investment will be substantially higher than the cost that you will incur on that. So, do not think in terms of prepaying your home loan. Keep your mutual fund as a vehicle of one medium term short term goal to accumulate for the down payment. Nothing beyond that.

Two balanced funds that you have high conviction on?

I keep recommending balanced funds and they prove to be one of the best vehicles for investors getting started. Tata Balanced and Franklin Balanced are two balanced fund for investors starting out.

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