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Acquiring your Home

Owning a home is the biggest asset creation for average people. With a little planning and the right investments, you can reach your goal. However, it is important where you choose to park your money. Investing in mutual funds (MFs) can help in creation of wealth as well as assets. They provide you with the freedom of investing and tapping into funds for any goal that may be there in the short or medium term.

Meeting monthly instalments or EMIs has come within the capacity of many households, especially in case of working couples. However, managing the lump sum down payment for the house is still a challenge. This is where MFs come handy.

WHEN DOES IT MATTER

A question that bothers almost everyone, living on rent and paying a bulk of salary towards the accomodation, is why lose the hard-earned money in paying rent while the same can fetch them their own house. Especially, at a time when property prices have, perhaps, settled down and availing oneself of home loans has become easier. If you are contemplating buying a house in the next five years, MF schemes could be the answer. By investing in MFs, you can generate the required down payment.

HOW THEY HELP

Owning a home is a compelling goal and saving for the down payment is a priority. Borrowing funds from friends, relatives or pawning valuables may not be the best idea for the latter. Plan early, so you don’t have to fall back on such sources. If your personal circumstances are right for buying a home, start by creating a savings plan. Get an idea of the purchase price and the monthly instalments you can afford. Estimate what you’ll need for a down payment which is usually 20 per cent of the home price. Thereafter, calculate the amount of savings you need each month for the down payment.

WHERE TO INVEST

If the time horizon is short, say just a year away, it’s better to stash funds in a money market or liquid fund. The volatility factor in these funds is the least as they don’t take any exposure to equities. The idea is to preserve the capital and not take risks with the savings.

In most cases, the time horizon is 3-5 years. Here, you can go for equities as they need longer time-frame to perform. A little exposure may just provide an extra kicker to returns. Choose at least two funds for diversification and start saving under the growth option through the SIP process. Ideally, keep the portfolio tilted towards debt even if you ready to take risk. There are balanced funds that suit this situation. Balanced or hybrid funds allocate assets in the portfolio to both equity and debt. The equity component provides the power of returns while debt provides stability against volatility. Such funds will not rise as much as a pure equity fund, but will not fall as much either.

An alternate way, when the goal is at least five years away, is to save through the equity linked savings scheme (ELSS). Such schemes help in saving taxes. And with a lock-in period of three years, the reason to stay invested in equity market for long exists.

STRATEGISE YOUR MOVES

Remember, even debt funds are subject to interest rate risk. If your goal is five years away, you need to take higher volatility in your stride and invest in diversified equity funds, start shifting to less volatile debt funds at least two years before reaching the goal. And with just one-year away from the desired date, shift completely to a liquid fund. Your little savings every month may not affect your household budget and yet create a lump sum required for meeting the down payment for your house at the right time.

Next To Come: Caring for Parents