I am 26 years old IT professional and have monthly savings of Rs. 30,000. Currently I have Rs 70,000 invested in Alliance Basic Industries, Rs. 70,000 in Franklin India Prima and Rs. 20,000 in Canpremium Growth.
I'd like to buy a property of Rs 10 lakh as soon as possible. I also have a plot presently valued at Rs 3 lakh. Should I sell the plot and invest that money in diversified equity funds? How should I allocate my portfolio to achieve my goal of Rs 10 lakh as soon as possible? What should be my investment strategy as I have 30K per month to invest?
I want to fully pay for the property at once and am not taking home loan inspite of having tax benefits due to following reasons because I don't want to give the interest to the bank and also because my savings will then go in repaying the loan and its interest and thus will not be available for capital appreciation.
It makes us happy that our readers are not just reading about mutual funds but investing in them also. Your basic query is how to raise Rs 10 lakh as soon as possible for buying property.
The solution you are looking at is capital appreciation through a portfolio of equity mutual funds. However, before we go into the pros and cons of this approach we would like to touch upon some of the other related issues you have raised.
An abhorrence of paying interest is bred into us, often for many valid reasons. Just as compounding increases the value of your investments it also increases the total interest you have to pay on a loan. But then there are benefits of taking a loan also. The most obvious one is that you are able to obtain what you need instantly. There are less obvious benefits also. The first is tax concessions.
Interest repayment of upto Rs 1,50,000 is deducted from your income while calculating tax. Similarly a benefit of Rs 20,000 on principal is also available. By taking a housing loan you can avail of this benefit. The amount saved on tax will also effectively reduce the rate of interest you are paying.
Coming to the rate of interest. Currently most housing finance companies charge an interest of around 8 per cent for loans with a tenure of 15 years. This is a historic low and even a couple of years back interest rates were as high as 12 per cent. Your salary seems sufficient to enable you to pay back this loan without straining your ability to invest for capital appreciation. If you take a loan of a smaller tenure then the interest rate can also be slightly less.
In view of the quick requirement of this 10 lakh property you will have to marshal all your resources. Your Rs three lakh in property can come in useful here if you can liquidate it. With this sum in hand you already have thirty per cent of the resources required to buy your dream house.
Now regarding your desire for capital appreciation. The soaring market of the past year makes one feel that capital appreciation is assured by investing in equity mutual funds. But there can be nothing further from the truth as mutual funds do not offer guaranteed returns and the value of your investment can rise or fall and you may not even get back your initial investment. Equity funds are ideal investment options for long-term growth of capital. In the short-term returns can fall and so do not look at these to meet your immediate needs.
For your equity portfolio a good starting point can be some of the five star rated funds. The details of these are available in the scorecard section of the magazine. Once you shortlist a few funds go in for a systematic investment plan. This will help you invest in a regular manner with maximum convenience.