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Building a home without a loan: Reader seeks advice

Ramalingam

Ramalingam Kalirajan  |6568 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Sep 18, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more
Santha Question by Santha on Sep 17, 2024Hindi
Money

Hello Sir, I am planning to construct a home in next 5 years and current estimated construction cost is Rs.50 Lakhs. Currently I have Rs.25Lakhs on hand. Could you please provide your input to construct a house without taking a home loan.

Ans: You’ve already made significant progress towards your home construction goal. Having Rs. 25 lakhs on hand is a solid start, and it reflects your strong savings discipline. The estimated construction cost of Rs. 50 lakhs, means you're already halfway there.

Now, let's explore how you can reach your target in the next five years without taking a home loan.

Defining the Time Horizon
You have a five-year timeline to accumulate the additional Rs. 25 lakhs needed for construction. This is a reasonable timeframe, and with a well-planned strategy, you can achieve it comfortably. You’ll need a mix of saving and investing to reach this goal efficiently.

Creating a Savings Plan
Set Aside Fixed Monthly Savings: Based on your financial situation, aim to set aside a specific amount every month towards your home construction goal. By systematically saving over five years, you can reduce the financial strain and accumulate the required funds gradually.

Assess Your Current Expenses: Review your current expenses to identify areas where you can cut down without affecting your quality of life. The money saved can be redirected to your home construction fund. Even small adjustments in your spending can make a big difference over time.

Building Your Investment Strategy
Invest for Growth: Since you have a five-year horizon, it's essential to balance risk and return in your investment portfolio. Avoid low-return instruments as they may not help you reach your goal in time. At the same time, avoid overly risky investments as they can expose your capital to market volatility.

Diversify Investments: A balanced portfolio that includes a mix of equity and debt funds will allow you to grow your savings over five years. You already have Rs. 25 lakhs in hand, so invest it in a diversified manner, ensuring some liquidity to avoid being locked into long-term instruments.

Focus on Actively Managed Funds: Instead of choosing index funds or direct investments, actively managed funds can offer better returns. These funds are managed by experts who can make decisions based on market trends, providing you with a higher growth potential. This is especially important when working towards a specific financial goal.

Protecting Against Inflation
Construction Costs Could Rise: In five years, the cost of materials and labour is likely to increase due to inflation. Factor in at least a 5-10% increase in construction costs when planning. This means you might need more than Rs. 50 lakhs in five years. Investing in inflation-beating products will help your money grow at a rate that offsets this rise.

Reinvest Returns: As your investments generate returns, ensure you reinvest them. Compounding can significantly boost your overall corpus, helping you to accumulate the funds needed without additional contributions.

Maintaining Liquidity
Keep Some Funds Liquid: While long-term investments are crucial, it's equally important to keep a portion of your funds liquid. You may encounter unplanned expenses during the home construction phase. Having accessible cash will help you manage these without disturbing your primary savings.

Short-Term Investment Options: In the last year before construction begins, it may be prudent to shift a portion of your funds to safer, short-term investments. This ensures that your money is readily available when you need it, while also reducing exposure to market volatility as the construction date approaches.

Monitoring and Reviewing Your Progress
Regular Reviews: Periodically review your investment portfolio and savings progress. If your investments aren’t performing as expected, you may need to reallocate funds to higher-yielding options. Monitoring your progress will also help you stay on track and make adjustments as needed.

Adjust for Market Conditions: Be prepared to adjust your strategy depending on market conditions. If the equity market performs well in the early years, you might want to lock in some gains by moving funds to safer instruments closer to the construction date.

Considerations for the Final Year
Capital Preservation: In the final year before construction, shift most of your corpus into low-risk options to protect your capital. This is crucial to ensure that any market volatility doesn’t negatively impact your ability to fund the construction.

Short-Term Liquidity: In the last 6-12 months, having more liquid options, such as short-term debt funds, will give you easier access to your funds when construction begins. This will help you meet payments without having to liquidate investments at unfavorable times.

Emergency Fund Considerations
Maintain an Emergency Fund: While working towards your home construction goal, don’t compromise on your emergency fund. It’s important to have a separate fund for unexpected expenses to avoid dipping into your home construction savings.

Sufficient Buffer: Keep at least 6-12 months of living expenses in an easily accessible account. This will give you peace of mind and financial flexibility if any unforeseen costs arise during the construction process.

Final Insights
Consistent Savings: Consistently saving towards your goal is the key to building the required corpus without taking on debt. The earlier you start, the more comfortable it will be to reach your target within the five-year period.

Balanced Risk: Opt for a balanced investment strategy that offers growth with controlled risk. Avoid overexposing your funds to high-risk instruments, especially as you get closer to your construction date.

Reinvest and Compound: Reinvest any returns to take full advantage of the power of compounding. This will accelerate your journey towards accumulating the necessary Rs. 50 lakhs.

Account for Inflation: Keep in mind that construction costs will likely increase over time. Plan your savings and investments to cover a potential rise in expenses by the time you're ready to start construction.

By following these strategies, you can construct your dream home within five years, all while avoiding the burden of a home loan.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
Asked on - Sep 19, 2024 | Answered on Sep 20, 2024
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Hello Sir, Thank you for your suggestion. Could you please name a few mutual funds and the allocation percentage to invest those 25 Lakhs in order to accumulate the sufficient corpus for construction. Thanks in advance.
Ans: Naming specific mutual funds or allocation percentages in an open forum is not ideal, as your needs, risk tolerance, and goals require personalized planning.

I recommend you contact a Certified Financial Planner (CFP) or a Mutual Fund Distributor (MFD). They can tailor a strategy based on your specific situation and help you with the right fund selection and allocation to meet your construction goals.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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Ramalingam

Ramalingam Kalirajan  |6568 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on May 20, 2024

Asked by Anonymous - May 07, 2024Hindi
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Hi Gurus, Am 29 years old and currently contributing NPS 5k pm, EPF 10k pm, Quant ELSS 10k pm, UTI Nifty 50 10k pm, within 7-10 years any way to accumulate corpus with 1 crore for building new house without home loan, am a budding financial planner and need all your advice, I can monthly accomodate max 50k and wanted to diversify my portfolio.
Ans: Building a Corpus for Your Dream House
Current Investment Strategy
Your commitment to saving and investing is commendable, with contributions to NPS, EPF, ELSS, and index funds.

Assessing Time Horizon
With a target of accumulating 1 crore within 7-10 years, it's crucial to assess the feasibility of achieving this goal within the given timeframe.

Diversification Strategies
Diversifying your investment portfolio can enhance returns and mitigate risk. Consider exploring various asset classes such as equities, debt, and alternative investments.

Equity Investments
Equity investments, particularly in well-managed mutual funds with a track record of consistent performance, can offer attractive returns over the long term.

Debt Investments
Allocating a portion of your monthly investment towards debt instruments like corporate bonds or fixed-income securities can provide stability to your portfolio and generate regular income.

Systematic Investment Planning (SIP)
Continue your disciplined approach to investing through SIPs, ensuring regular contributions to your chosen investment avenues and taking advantage of rupee cost averaging.

Regular Portfolio Review
Regularly review your investment portfolio to assess performance, rebalance asset allocation, and make necessary adjustments based on changing market conditions and financial goals.

Potential Challenges
Consider potential challenges such as market volatility, inflation, and economic uncertainties that may impact your investment journey and adjust your strategy accordingly.

Recommendations for Portfolio Enhancement
Increase Monthly Contributions: Explore options to maximize your monthly investment allocation to accelerate wealth accumulation and achieve your target corpus within the desired timeframe.

Explore Tax-Efficient Investment Avenues: Consider tax-saving investment options like Equity Linked Savings Schemes (ELSS) or other tax-saving mutual funds to optimize tax benefits while building your corpus.

Professional Guidance: Seek guidance from a certified financial planner to design a customized investment strategy tailored to your financial goals, risk tolerance, and time horizon.

Stay Informed: Stay informed about market trends, economic indicators, and investment opportunities to make informed decisions and capitalize on growth opportunities.

Conclusion
By maintaining a disciplined approach to saving and investing, diversifying your portfolio, and seeking professional guidance, you can work towards achieving your goal of accumulating a corpus of 1 crore for building your dream house. Stay focused on your financial objectives, review your investment strategy periodically, and make adjustments as necessary to stay on track towards realizing your aspirations.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

..Read more

Ramalingam

Ramalingam Kalirajan  |6568 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jul 10, 2024

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Good Day Sir, I am 33 now and both husband and wife earning around 1.6 lakhs per annum. We are renting a home of 18000 PM. Total expenses are 1.3 lakhs per month(Including Insurance, basic expenses, term, mutual fund). Investing 21000 PM in mutual fund, want to take a home in city like Noida of around 65 Lakhs. Loan would be around 50 lakhs for 20 yrs of time frame. Current savings is around 20 Lakhs. Can I take a home on loan now or should I wait?
Ans: Assessing Your Current Financial Situation
Income and Expenses
You and your spouse earn around Rs 1.6 lakhs per month.

Your total expenses are Rs 1.3 lakhs per month.

This includes rent, insurance, basic expenses, and mutual fund investments.

Savings and Investments
You are investing Rs 21,000 per month in mutual funds.

Your current savings stand at Rs 20 lakhs.

Home Purchase Consideration
You want to buy a home in Noida worth Rs 65 lakhs.

You plan to take a home loan of Rs 50 lakhs for 20 years.

Financial Stability and Decision-Making
It's crucial to understand the impact of this decision on your financial stability.

Buying a home is a significant financial commitment.

Evaluating the Home Loan Option
Loan Details
A home loan of Rs 50 lakhs for 20 years.

Monthly EMI will depend on the interest rate.

EMI Impact on Monthly Budget
Calculate the EMI to understand its impact on your monthly budget.

Ensure the EMI fits within your budget without straining finances.

Comparing Renting vs. Buying
Currently, you pay Rs 18,000 per month in rent.

Compare this with the expected EMI.

Buying a home may offer long-term benefits.

Pros and Cons of Buying a Home Now
Advantages of Buying Now
Fixed Asset
Owning a home provides a sense of security.

It's a long-term investment for your family.

Appreciation Potential
Property values in Noida may appreciate over time.

This can be beneficial for your investment.

Personalization
You can customize your own home to your liking.

This adds to your comfort and satisfaction.

Disadvantages of Buying Now
Financial Strain
A large EMI could strain your monthly budget.

Ensure you can manage all expenses comfortably.

Opportunity Cost
Using savings for a down payment may reduce your liquidity.

Consider the impact on your emergency fund.

Interest Burden
Home loans come with interest payments.

This adds to the total cost of the property.

Alternative Investment Options
Increasing Mutual Fund Investments
Consider increasing your mutual fund investments.

This can help build a larger corpus over time.

Power of Compounding
Mutual funds benefit from compounding returns.

The longer you invest, the more your money grows.

Risk Diversification
Diversify your investments across different mutual fund categories.

This reduces risk and enhances returns.

Regular Funds vs. Direct Funds
Benefits of Regular Funds
Investing through an MFD with CFP credentials provides professional guidance.

Regular funds offer advisory support.

Drawbacks of Direct Funds
Direct funds require more active management.

You may miss out on expert advice and insights.

Assessing the Timing
Market Conditions
Consider the current real estate market conditions in Noida.

Buying during a favorable market can be advantageous.

Personal Financial Goals
Align your home purchase with your long-term financial goals.

Ensure it doesn't compromise other important financial objectives.

Future Income Prospects
Evaluate your future income prospects.

A stable or increasing income can support your loan repayment.

Final Insights
Comprehensive Financial Plan
Create a comprehensive financial plan.

Include your home purchase, investments, and savings goals.

Emergency Fund
Maintain a robust emergency fund.

Ensure you have 6-12 months of expenses saved.

Professional Guidance
Consult a Certified Financial Planner (CFP).

Get personalized advice tailored to your financial situation.

Balanced Approach
Balance your home loan with other financial commitments.

Ensure a comfortable lifestyle without financial stress.

Regular Review
Regularly review your financial plan.

Adjust it based on changes in income, expenses, and goals.

Long-Term Perspective
Keep a long-term perspective.

Consider the overall impact of your financial decisions on your future.

Conclusion
Buying a home is a significant decision.

Assess all factors carefully.

Ensure it aligns with your financial goals and stability.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

..Read more

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DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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