How to save for your home

I plan to get married in the next two to three years and after that purchase an apartment.

Currently, I can save up to Rs 3,000 per month after all my expenses.

How must I proceed?

- Amit Patil

Hi Amit!

With a time horizon as short as three years, you really do not have a choice of investment vehicles. Particularly with the stock market at this current level, your risk of losing money in equities is very high.

What is the total budget you have in mind for your home? Can it be postponed for a while?

Let's say you have a budget of Rs 11 lakh (Rs 1.1 million) and can postpone the purchase of your home to five years.

You could plan to invest Rs 3,000 every month partly in diversified equity mutual funds and partly in debt mutual funds (funds that invest in fixed return investments). This will probably give you a corpus of about Rs 2,25,000 for downpayment.

Your Equated Monthly Installment (amount you pay every month to service your loan) for the balance will be Rs 8,000 - 9,000. This you will have to pay out of your salary, which should be substantially more five years down the road.

You can do your monthly investment in the form of a Systematic Investment Plan. This entails a fixed amount going every month into your mutual fund. Here are two fund options you could look at for Rs 3,000 per month.

HDFC Equity Fund: Rs 750

Grindlays Floating Rate Fund – Short-Term Growth: Rs 2,250

I hope that helps.

• Are you a smart investor?

I am 27 with a salary of around Rs 3,80,000 per annum.

I am servicing a 20-year home loan of Rs 15 lakh (Rs 1.5 million) from HSBC. I bought this home and live here with my parents and brother.

I plan to get married within a year.

These are my current investments.

Rs 13,000 - Initial Public Offerings
Rs 12,000 - Shares
Rs 10,000 - Tax saving mutual funds
Rs 15,000 p.a. - Bajaj Allianz Unit Gain Plus Life. This insurance premium must continue for 10 years. 

Your comments please.

- Imran S

Hi Imran!

Congratulations on your efforts to save and invest at such an early age. With a family to support and a loan to pay off you are certainly amongst few people who deal with money so carefully and respectfully.

I would like to share a suggestions with you:

Investing

Do you really find the time to indulge in IPOs and stocks? Or have you just been doing it only for the last year or two, since the market has been good?

My experience is that over the long run, the benefits of investing directly in stocks/IPOs does not justify the efforts involved. You might want to consider using equity mutual funds instead and using the time freed up to focus on professional achievements/career advancing efforts.

Insurance

Unit linked insurance products are often a very expensive way of investing and insuring.

Usually, buying a term cover separately and managing investments through mutual funds independent of insurance, works out more cost effective.

You appear to be the sole bread winner with quite some financial responsibility. I would strongly suggest that you review your insurance needs.

You should certainly compare term policies (which is what we recommend over other insurance investment products) from private insurance companies such as ICICI Prudential and HDFC Standard Life with what LIC has to offer and buy the one which quotes you the lowest premium.

Read Insurance for your 20s to understand term insurance in detail.

Loan

You should also work at paying back your loan as early as possible, if your finances allow you to do so. In the coming months, we might see rising interest rates and falling stock market returns. If your home loan is a floating rate loan, you might be better of paying off the loan.

I also think that you should actively consider approaching a financial advisor who might be willing to charge you by the hour. That way you might not end up spending too much and yet get extremely valuable and independent advice.

I sincerely wish you all the best.