Having a place to call your own is a dream that lives in the hearts of many. We are living in a time where the cost of properties seems to defy gravity, so the chance of turning that dream into a reality seems just out of reach for most. What people don’t realise, however, is that a well-thought-out investment plan can be their secret weapon on this homeownership quest. In this blog, let’s take a look at some of the Best Investment Plans for Homebuyers, and discover some valuable tips for successful investing.
Understanding Your Housing Goals
Buying a house can be generally seen as a mid or long-term financial goal. First, you have to determine the amount of money you need to buy the house. This should factor in the inflation rate, and you should have a general idea about how inflation will impact the housing in the area or city of your choosing. Another important thing to remember when you are estimating the amount is the future cost. You have to take into account the registration fee, home insurance, tax, and maintenance costs that come with homeownership.
Next, you have to calculate the amount you need to save. When you apply for a home loan, you have to pay a certain percentage of the loan upfront. This is called the down payment, and the minimum downpayment you need to make is 20%. Making the lowest possible down payment however isn’t considered a wise move, because, over the long term, you end up paying a massive amount of interest. If you make a higher down payment, say 40% you will have to pay less interest and make your life much easier, as your EMI will be affordable.
Then you have to establish a monthly savings goal. Let’s take an example – Suppose you calculate your down payment at Rs. 15,00,000. If you save Rs. 25,000 every month for 5 years, you will have accumulated the total amount.
Remember the impact of inflation in the savings period. If you just save, you will allow inflation to erode the value of your money. This is why Investment planning is important. Through investing, not only will you protect your money’s value but you’ll also be able to buy your house faster. An investment planner can help you accurately calculate your savings goal, and also craft a realistic budget to meet it regularly.
What Are The Different Investment Plans For Buying A House
Every financial goal demands a different strategy, and buying a home is no different. There are plenty of Investment Options to Buy a House in India and it can be pretty overwhelming to sift through them, especially for new investors. Here we’ve rounded up some of the Best Investment Plans for Homebuyers to make your journey easier.
1. Real Estate Investments
You read that right! It might seem ironic to invest in real estate to own your home, but historically real estate has provided good returns on investment. It’s a reliable and versatile option that one can invest in many ways. You can take the traditional route and buy a physical property that can appreciate over time while you collect rental income, but it requires a large upfront investment. A great option that’s gaining popularity in India is Real Estate Investment Trusts or REITs for short.
REITs allow you to invest in real estate without having to commit to a large lump sum. The way they work is simple – Companies pool funds from many investors to buy and manage a diversified portfolio of properties that generate income. These properties include commercial spaces, offices, malls, residential buildings, and infrastructure projects among others. Investors have to purchase shares which make them part owners of the total real estate portfolio. The trust generates income from selling properties or rent and then this income is distributed among the investors in the form of dividends. Another option is real estate mutual funds, which also provide a convenient way to participate in the real estate market without needing a large corpus in a lump sum.
2. Mutual Funds
Mutual funds are popular investment vehicles for retail investors in India because of their flexibility. There are mutual funds available that focus on short-, mid-, and long-term goals, and funds that cater to people with low, moderate or high-risk appetites. What makes them even more attractive is the ease of online investing. Let’s take a look at some types of mutual funds
2.1. Equity-oriented mutual funds
As the name suggests, these funds invest in equity and equity-related instruments. They are a good option for investors seeking exposure to the stock market. The thing about equity is that it comes with high risk, but the returns are also substantial, so if you are someone who is willing to take on a high level of risk for high returns, equity mutual funds are a great option. Generally, these funds are recommended to people who are investing with a long-term mindset because that reduces the risk of losing capital, but they can potentially help you reach your goal faster if you have a high risk tolerance.
2.2. Hybrid Funds
These funds balance equity with debt, so they are suitable for people who have moderate risk tolerance. Hybrid funds such as Dynamic Asset Allocation funds manage risk by shifting investments among different asset classes according to market conditions. This way they optimise returns while managing risk.
2.3. Index Funds
These funds aim to replicate a specific index, such as Nifty 50. They don’t aim to outperform the market but rather provide returns in line with the index. They do this by using a market capitalization-weighted approach. This means that larger companies in Nifty50 will have a higher weight in the fund. Since these funds invest in the top-performing companies, the risk isn’t as high as other mutual funds, and the returns are generally above the rate of inflation. These funds are a good option for people with low to moderate risk appetite.
Do note that there are over 40 Asset Management Companies in India, and each offers many different schemes. If you are new to mutual fund investing, you should consider taking advice from a mutual fund consultant. A certified mutual fund consultant can help you filter through the many schemes and guide you in selecting funds that align with your financial situation and risk tolerance.
3. Fixed Deposits (FDs)
A fixed deposit is a solid investment option for people with low to no risk tolerance. FDs provide a fixed interest rate over a specified period, so they can help you get steady returns while keeping your money safe. There are two ways you can invest in a fixed deposit – You can take the classic Bank FD route, or you can invest in a Corporate FD. The risk associated with Corporate FD is higher, but generally, the returns are also approximately 0.7% to 1.5% higher than Bank FDs. Remember however that fixed deposits don’t offer high liquidity. You can prematurely withdraw from Bank FDs, but you will also have to pay a fine. Some corporate FDs have a lock-in period so your access to funds will be restricted. Before you decide on an FD, you should carefully consider the returns, withdrawal conditions, and associated penalties.
4. Gold
Historically, gold has been one of the most preferred investment options among Indians, and for good reason. It has generally served well as a hedge against economic uncertainties and is known for its stability. The traditional way to invest in gold is through physical ownership of gold coins, bars, and jewellery, but now one can invest in gold without physically owning it. These are called digital gold investments, and there are various ways you can invest in them. Two solid options are
Gold Exchange-Traded Funds: Gold ETFs are investment funds that are traded on stock exchanges and track the price of gold. You can buy shares in the ETF, where 1 gold ETF equals 1 gram of gold. This way you can gain exposure to gold prices without physically owning it.
Sovereign Gold Bond: These are backed by the government and are securities traded in grams of gold. The government pays interest to the investors on the investment.
5. ULIPs
Unit Linked Insurance Plans are a combination of investment and insurance, so they offer a double advantage. Through ULIPs, not only can you create wealth to buy your dream house, but also protect your loved ones in case of any unfortunate event. When you invest in ULIP, part of your money goes toward life cover, while the rest goes toward investing in a fund of your choosing. Based on your risk appetite, you can choose to invest in equity funds, debt funds, or balanced funds, so ULIP also provides you flexibility while offering protection.
Tips for Effective House Investment
We’ve got some tips to help you make the most of your investment journey –
- Start early. It may seem like a simple statement, but the thing about investing is that it takes advantage of the power of compounding. The magic of compounding works best with time on its side. By starting early, your money has more time to grow and you can see its exponential benefits, especially in the later years.
- Set clear financial goals. The importance of clear and realistic goals cannot be overstated. Specific goals are the foundation of a solid financial plan.
- Be disciplined and consistent in your investment approach. If you choose a mutual fund with SIP, try to contribute regularly.
- Don’t run after the highest return, rather aim to get the highest returns possible. There is a subtle difference here. Remember, the Best Investment Plan for Homebuyers is the one that aligns with their unique financial situation, specific goal, time horizon, and risk appetite.
- Diversify your portfolio. This means you have to spread your investments across different kinds of assets. This prevents loss of capital in case any one asset fails and helps you minimise risk.
- Build an emergency fund. This fund can help you deal with any unexpected expenses and will prevent you from taking debt or prematurely liquidating your assets in case of emergencies.
- Keep a tab on your investments. Regularly review your portfolio and make adjustments as market conditions evolve or your financial situation changes.
Also Read: How to Invest For Your Home Down Payment?
Conclusion:
Buying a home can indeed be easier said than done, but if you start this journey by being realistic and setting specific housing goals, estimating the required savings, and identifying the most suitable investment options, you can build a solid foundation. Creating and sticking to a budget will help you achieve your savings goal, so be disciplined. Investment planning is the key to realising your dream of homeownership, so if you are ever unsure about any investment option, don’t hesitate to seek guidance from a professional. An investment advisor can assess your financial situation, goals, and risk tolerance and help you select the options that suit you best.
