Q1. I'm a 26 yo Software Engineer and I have been working at an International Tech company for the past 3 years. I make 12 lpa. I’ve been thinking of buying a 2bhk in my hometown. I have some savings and am thinking of borrowing some from my parents for a downpayment. The house would cost me around 60lakhs. Do you think I should wait some more and miss out on the current rate?
-Sreejith Nair, Kochi
Buying a house is perhaps going to be one of the biggest investments you’ll make in your life. You are still quite young so we’d recommend you to analyze if you are truly ready for it.
Here are a few questions you ask yourself:
1. Do I have enough monthly income to afford the mortgage & other recurring expenses on the property?
At the time of booking the property, you will not just be paying the property cost but also a possibly high year-on-year rate of interest (starting from 6.5% and might go up to 20%), GST, processing fees and registration fees, and broker fees in case you need one.
And even after securing a house, there will be other recurring costs like property taxes, maintenance, insurance, repairs, and utilities.
While the growth rates of real estate boomed in history, they have slowed down of late. So you shouldn’t let the fear of missing out on the current rate take over your financial planning. You should buy the house only when you can afford it and ensure it comes in the way of your other financial goals.
You seem to have a stable job, however, do you see yourself working and growing in the same field? Buying a house typically involves a 30–40 year mortgage so unless you have the readiness or a solid backup, making such a big investment can come in the way of your financial freedom. Buying a property can be a liability if your investments are not carefully planned or thoroughly structured.
2. How do you plan on using this investment?
Do you plan on staying there in the future? Or maybe give it on rent to make passive income? In that case, study the real estate trends of that location, and see how much you can expect to make. Compare it with the rate of interest you are paying to the bank.
3. Most importantly, do you have enough money for a downpayment?
You mentioned you have savings, but will they be enough to cover a significant portion of the down payment? Most real estate properties charge about 10-20% of the house cost as a down payment.
4. Would you be able to save enough money for your other goals?
While saving and investing are important goals for people in their 20s, you might also have other goals like international travel, saving up for your wedding or further education, a car, retirement, etc. Remember that buying a house or having a mortgage might limit those plans.
While the property rates might rise in the future, that shouldn’t be the reason why you should rush the decision. Prioritize getting financial security first. Start goal-based investing if you haven’t already.
READ MORE: These simple steps will help you escape long-term capital gain tax on property
Q2. I’m a 30 yo working in the education sector who just learned about the importance of investing. I think I still don’t completely understand how it works but my friends suggested that I’ll be able to learn better by starting soon. I’m thinking of investing in index funds, should I go for SIP or lumpsum investment?
-Avinash Mishra, Patna
It’s great that you are starting your investment journey. And yes, you will learn better on the journey so you can start with a small investment till you learn the basics of investing. It will help to read up on a few concepts like NAV, Expense ratio, AMCs, exit load, etc.
New investors can start with index funds as they are relatively stable compared to other equity mutual funds and have low expenses associated. Index funds work on a strategy that seeks to maximize returns by minimizing trading. Hence you wouldn’t have to worry too much about selecting the MF schemes.
Another thing to consider is to invest in direct MFs. Regular Mutual funds have a higher expense ratio as they also have brokerage fees to pay. This amount might not seem a lot in the short run but eat up a significant portion of your returns.
Now, coming to the most important part— should you go for SIP or lumpsum.
SIPs is a systematic investment plan approach where you periodically invest a small amount in select mutual fund schemes.
READ MORE: SIPs score over lump sum investments in the mutual fund industry
Benefits of SIPs:
1. You can set up SIPs as low as Rs. 500. It reduces the burden of investing a large amount, and your investment cost is also low.
2. You can reap compounding benefits by staying invested for the long term.
3. SIPs average out the risk by investing in regular intervals despite market fluctuations. So you end up purchasing more units during market downturns and benefit from high growth rates during uptrends. That too without having to time the market.
The Lumpsum Investment approach is when you use available funds at one go to purchase as many units of the mutual fund scheme as you want.
1. It is also well-suited for investors without a fixed income. As you only have to make a one-time investment and don’t have to commit to monthly investments.
2. Lumpsum investments are preferable when mutual funds’ NAV (Net Asset Value) is low, as it allows you to buy more units at less cost. When you are an existing investor you might want to invest lumpsum if the current market value (NAV) is below your average NAV
3. Lumpsum investment approach tends to do well in a rising market.
As you are just a beginner in investing, lumpsum approach might not work best for you. It might be risky to invest a huge amount in a fund you don’t know much about, especially in a falling market. So think through and invest wisely.
Note: This story is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.
Kuvera is a free direct mutual fund investing platform.