Get the target right

Before starting a journey, you must know the destination. Similarly, before starting investments, it is important to know the target value. Calculate the corpus size adjusted for inflation. For example, if you intend to buy a house three years from now, that cost Rs 1 crore today, then you should be prepared to pay Rs 1.19 crore assuming 6% rate of inflation. In an expanding economy such as India, home prices tend to keep pace with inflation. If you do not account for inflation, then you may fall short of the required corpus at the time of home purchase.

Once you know the future value of the house, compute the down payment. In most cases, home buyers prefer to make a down payment of 10% to 25% depending upon the rules of the home loan product and lenders assessment of the borrower and the security (the house property in this case). The higher the down payment, lower the money borrowed. This reduces the burden of servicing the home loan. You should also consider cash-flow needs at the time of home purchase and other financial goals while ascertaining the quantum of down payment.

If you choose to make a down payment of 25% of the future value of the house, then you should prepare an investment plan to accumulate Rs 29.77 lakh or around Rs 30 lakh over three years, in the above example.

Plan and execute

Do not get overwhelmed with the number. Regular investments in low-risk avenues, such as debt mutual funds, can help you reach your goal. Your existing investments can also chip in. A carefully crafted plan can be of great help.

Let’s continue with the above example. You need Rs 30 lakh at the end of 3 years. You already have Rs 5 lakh invested in a debt mutual fund. The expected rate of return on fixed income investment is around 6.5% p.a. over next three years. A systematic investment plan (SIP) of Rs 60,372 (approximately Rs 60,400) annually in a debt mutual fund should help to reach your target. An SIP in a short duration fund or a money market fund can be a good choice.

If you intend to buy the house in short term, say in three years or less, then you should stick to an SIP in a debt mutual fund. If you are considering the home purchase in the medium term, then you can also invest some money in a hybrid fund – either an aggressive hybrid fund or a balanced advantage fund. If you are allocating money to hybrid schemes, then you should be watchful of your investments. As you move closer to the goal, you should move the accumulate corpus in less risky debt schemes. If you are keen to buy a house after retirement and have ample time on hand, then you can invest in units of equity mutual funds. Equity mutual funds can be considered only for tenure of five years and more.

Why not stocks or equity funds?

Though debt mutual funds are suitable to accumulate money for the near-term financial goals, the potential returns are relatively low. Hence, some individuals consider investing in stocks or equity funds for higher returns. The idea is that high returns can help you reach your target quicker. However, this may not be a prudent approach.

While equity mutual funds or index funds can generate returns in excess of inflation, they are inherently volatile in the short term. If you invest in an equity scheme and the stock market enters in a volatile phase causing marked-to-market erosion of the invested corpus, then you may have to postpone your house purchase.

Debt funds can be an ideal vehicle to accumulate the corpus required for down payment. Arranging the down payment for your dream home not only frees you from borrowing money from family or friends, but also provides a sense of achievement. This boosts your confidence to achieve other financial goals, including repaying the home loan.

Individuals from Gen Z and Millennials may take time to settle down and may delay home purchase until middle age. However, starting early to save for a down payment- potentially as high as 50% of the house value, can put them on strong foot financially.