Buying a home, on the other hand, is easier said than done. Most cities’ real estate prices have already reached the moon’s orbit. As a result, you will have to stretch your financial resources in order to purchase your dream home. If you do not inherit a large sum of money, you will need to take out a home loan to purchase your dream home. In that case, you will be required to pay a significant amount of interest (usually more than the principal amount of the home loan). And you will end up devoting a significant portion of your monthly income to EMI. All of this can be a financially stressful experience. As a result, it is critical that you devise a strategy to realize this dream. In this article, we will explain how to invest your money wisely in order to accumulate the fund for the down payment on your dream home.
Determine How Much Money You Will Need to Purchase Your Dream Home
The first step should be to figure out how much money you’ll need to buy the house of your dreams. Consider additional costs such as registration fees, stamp duty charges, interiors, and so on when calculating the amount. These additional costs will not be covered by the bank’s home loan. As a result, it is preferable to budget for these expenses ahead of time. More importantly, you must account for real estate inflation when estimating the future value of your dream home. According to various reports, the annualized rate of increase in the average price of a home in the top seven cities will be 3.5 percent over the next ten years. So, if you assume a similar increase every year for the next decade, you will need to save Rs. 1 crore for a home that currently costs around Rs. 70 lakh.
Determine the Amount You Need to Collect
Banks do not lend you the entire amount to purchase a home when you take out a home loan. Banks typically lend up to 80% of the property’s value as a home loan. The remaining 20% must be raised by you on your own. This required upfront payment is known as a down payment. Only after your down payment is completely paid does the bank begin loan disbursement. However, ideally, you should pay at least 60% of the property value out of pocket, with the remainder covered by a bank loan. This significant portion paid by you will ensure that the total interest cost you bear to purchase the house is not excessive. Furthermore, the EMI will not place undue strain on you. In this case, because you will be purchasing a home worth Rs. 1 crore, you can obtain a loan of up to Rs. 80 lakh. However, it is always preferable to wait, accumulate a larger corpus, and make a larger down payment in order to reduce the monthly EMI. Here’s a table that shows how much your financial burden would be reduced if you saved for a larger down payment and took a loan for only 40% of the total cost of the property.
As you can see, by making a larger down payment, you can cut your interest costs by nearly 50%. Calculating the Monthly Investment Required to Collect the Down Payment. Once you’ve determined how much money you’ll need for a down payment, the next step is to invest it. However, before you dive in, make sure you invest the right amount so that you can collect the target amount. To calculate the amount, you must first determine how long you will need the money. Let’s look at how to calculate the investment amount using the previous example. Since you’ll need Rs. 60 lakhs and assume you’ll buy a house in 10 years, here’s how much you’ll need to invest each month.
Investing Rs. 26,000 solely for the purpose of purchasing a home, on the other hand, maybe a bit of a stretch for most of us. That’s because, while we all want to buy our dream home, we also want to achieve other goals, such as a happy retirement, and thus invest in them. Fortunately, there is a workable solution. You can begin with a lower amount and gradually increase it by a certain percentage each year. In the example we used, if you take this route, your amount will be reduced to Rs. 20,000 if you increase it by 10% each year.
Where Should You Invest in Building Corpus for Your Dream Home?
Since this is a long-term goal and you have a large sum to collect, equity is the asset class that gives you the best chance of collecting the money. This is because, in terms of long-term returns, equities have outperformed all other asset classes. Equity mutual funds are now the most convenient way to invest in equities. You can set up a SIP in these funds to save for your dream home. You can choose a fund from the following categories within Equity Mutual Funds.
Consider the following categories of Equity Mutual Funds.
Flexi Cap Mutual Funds
These are diversified equity funds that invest in businesses of all sizes and in a variety of industries. As a result, you will receive a portfolio comprised of large, mid, and small-cap stocks from various industries. This creates a diverse portfolio on its own. Furthermore, the flexibility of these funds allows fund managers to make portfolio changes as market conditions change.
Large and Mid Cap Mutual Funds
These funds make investments in India’s top 250 companies. As a result, there is a mix of large and mid-cap companies. Large-cap stocks are blue-chip companies that are market leaders in their respective industries. They generate relatively stable returns due to their size and strength. Mid-Cap space constituents are fast-growing companies that are challenging the segment leaders. These companies can outperform the market in terms of returns, but they can also be extremely volatile in the short to medium term. As a result, combining large and mid-cap stocks gives you the best of both worlds.
Mid Cap Mutual Funds
If you are comfortable with volatility, you can also invest in pure Mid Cap Funds. These funds invest in companies with market capitalizations ranging from 101 to 250. As previously stated, these companies in this space are prone to volatility in the short to medium term. This is due to the fact that these companies are not as financially strong as large caps, and their business models are not as well-established. They are, however, rapidly growing, which gives you the opportunity to earn good long-term returns.
Bottom line
In Conclusion, the key takeaways are that your budget estimate should account for additional expenses as well as rising inflation in the real estate sector. Making only the bare minimum down payment may result in a significant financial burden for you in the future. As a result, it is preferable to invest in a mutual fund for a few years and make a larger down payment.