Worried About High Home Loan EMI? MFs Can Help

Here's how to own your dream home without paying excessive interest on your EMIs, explains Ramalingam Kalirajan

For many, owning a home is a significant life goal. It's often seen as a symbol of status and security in society.

This desire drives people to go to great lengths, even taking on loans, to buy a house. But the question remains: When is the right time to buy a house?

Too often, people make emotional decisions, rush into buying a house with loans, and later regret their choice. Why? Various challenges arise.

For instance, a young professional might buy a home early in their career through a loan. If they face job loss, managing the EMI becomes difficult. Such financial burdens can later lead to regret.

When is the Ideal Time to Buy a Home?

The need for a home becomes more relevant when an individual is relatively settled -- married, with children, and in a stable job.

At this stage, frequent job changes are less likely, and one can choose a house in a location that aligns with both partners' preferences.

Planning ahead can make this process easier. By investing in mutual funds early on, individuals can accumulate enough savings to purchase a home with less or no loan. If a loan is still required, a smaller loan means manageable EMIs, reducing financial strain.

Mutual Funds as a Tool to Save for a Home

Let's consider a scenario where someone plans to save for a house through mutual fund investments while continuing to live in a rented house.

Suppose you plan to buy a house worth Rs 50 lakh today. If you rent a similar property, the monthly rent would be approximately Rs 12,500. However, buying the same house through a home loan at an interest rate of 9 per cent over 20 years would result in an EMI of about Rs 45,000 per month.

Now, instead of paying this EMI, you could:

• Pay the Rs 12,500 rent.
• Invest the remaining Rs 32,500 in equity mutual funds with an average return of 13 per cent per year.
• In 20 years, this investment could grow to approximately Rs 3.4 crore.

Future House Price Projections

If the house's value appreciates at 5 per cent annually, its price will be Rs 1.33 crore in 20 years. To accumulate this amount, one needs to invest around Rs 12,785 per month in equity funds with an average return of 13 per cent annually.

If the house appreciates at 8 per cent annually, its price will rise to Rs 2.33 crore in 20 years. To reach this target, one would need to invest Rs 22,460 monthly in equity funds.

Even with an 8 per cent appreciation rate, the investment plan remains feasible. Over time, rising salaries can help meet these investment goals while managing rent costs.

Strategic Investment: How to Plan

To achieve the desired corpus for a house, investing in higher-yield options like equity funds is essential. While direct equity investments carry high risks and require expertise, diversified investments in mutual funds are a safer choice.

Equity mutual funds invest across 30 to 80 stocks, reducing risk significantly. Additionally, professional fund managers handle these funds, increasing the potential for good returns.

Best Fund Categories for Home Savings

• Large-Cap Funds: Invest in top companies, offering stability with moderate risk.
• Multi-Cap Funds: Diversify across large, mid, and small-cap stocks for balanced growth.
• Flexi-Cap Funds: Provide flexibility to allocate funds across market caps based on opportunities.
• Multi-Asset Funds: Diversify across equities, debt, and gold for added security.

If your monthly SIP budget for house savings is Rs 20,000, consider allocating Rs 5,000 each into the four categories mentioned above.

This diversification spreads risk and ensures steady returns. Historically, top-performing funds in these categories have delivered annualised returns of 18 per cent-20 per cent, making the expected 13 per cent return highly achievable.

Final Thoughts

By continuing to live in a rented house and systematically investing in mutual funds, you can accumulate enough to buy your dream home in the future.

The table below shows the required monthly investment based on your savings timeline (10, 15, or 20 years) and expected house value.

This strategic approach helps you save efficiently, avoid heavy debt burdens, and eventually own a home with minimal financial stress.

• You can ask rediffGURU Ramalingam Kalirajan your questions HERE.

Ramalingam K, an MBA in Finance, is a Certified Financial Planner. He is the Director and Chief Financial Planner at holisticinvestment, a leading financial planning and wealth management company.

Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.

Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.