How To Plan For A Dream Home Using Mutual Funds

Mutual Funds for Your Dream Home

Making your own home is a big milestone in life. But in today’s generation, it is one of the major financial commitments you are making. Getting a home loan is not the problem; the matter to be worried about is the down payment. You have to save up a significant amount for your down payment to minimize the EMI amount. In terms of saving up money, the Mutual Fund becomes your best friend. 

If your question is about how a mutual fund can turn your dream home into reality then you are on the correct page. Come, let’s break it down in the easiest steps.

Step 1: Set Your Goals For Your Dream Home

When you are dreaming of buying a home then before you start investing, you should have a clear idea of what your dream home looks like. There are a few questions we recommend asking yourself, 

1. What is your budget? 
2. In which location do you want your home to be? 
3. What is your timeline to buy the home? 
4. Last but not least, how much do you need to save to pay the down payment? 

For instance, you’re aiming to own a home within 50 lakhs rupees. Then you must pay 20% as a down payment which is around 10 lakh rupees. When you want to buy a home within the next 5 years then you need to start planning to accumulate the amount and start investing accordingly.

Step 2: Identify The Correct Mutual Fund

• Short-Term

Let’s start with short-term purposes. If you are looking forward to purchasing a home within 1-3 years, then investing in low-risk options for Mutual Funds would always be ideal. For that, you will get three options. 

1. Fixed Maturity Plans (FMPs) always provide decent returns. If you are doing the mutual funds for a fixed period, then go for it.
2. Short-term debt funds are also a good option as the volatility is comparatively lower, therefore, it offers relatively stable returns. 
3. Liquid funds should be your first choice when it comes to short-term investments for your dream home. This kind of funds parks money safely and provides better returns compared to savings accounts. 

• Medium Term 

Now let’s assume you have a little bit of time in hand to buy the home. So, you are looking for a fund that can give you a better return within 3 to 5 years. In such cases, hybrid or balanced funds work better. 

1. There are some funds which are known as aggressive hybrid funds where you have to invest around 65 to 80% on equity and the rest on debt. 
2. Another example of a balanced fund is a dynamic asset allocation fund. Depending on the market condition, it automatically adjusts equity and debt allocation. 

• Long-Term

Let’s say you have 5 or more years in your hand to save money to pay the down payment for your dream home. In such conditions, equity Mutual Funds are one of the finest ways to build wealth faster with the help of the power of compounding. 

• Large-cap funds are always less volatile, therefore, conservative investors prefer to invest here. 
• Then comes flexi-cap funds, which provide flexibility by investing the amount in different market capitalizations. 
• Aside from large-cap and flexi-cap you can also invest in index funds. It provides a lower expense ratio because it passively invests in top performing companies. 

Step 3: Find The Ideal Investment Strategy

Once you are done with choosing your mutual fund then it is high time to select a strategy to start investing. There are two main strategies we are talking about, 

• SIP or Systematic Investment Plan

When you are choosing a SIP, that means you want to invest a fixed amount in a mutual fund every month. Most people choose SIP for their investment because it provides certain benefits, such as, 

1. It makes a good discipline habit of saving for the investors. 
2. The market is always risky, but SIP helps in avoiding market timing risks. 
3. It allows the investors to benefit from rupee cost averaging. 

• Lump Sum Investment Plan

This strategy can be only accepted when you have a large amount to invest. For example, if you got a bonus from your company then you can invest the entire amount as a lump sum in a mutual fund. But if you want to minimize the risk factors you must go for investing gradually through Systematic Transfer Plan (here you can move money from debt fund to equity fund within a small installment). 

Step 4: Monitor Your Investment

Once you have started the investment, it is high time to monitor and adjust your investments because the condition of the market can change at any time. After every 6 months, check 3 things, 

1. Whether your investments are performing well or not. 
2. Whether your portfolio needs any adjustment for allocation or not. 
3. As your goal is near, if you need, you can switch to a safer option. 

Step 5: Redeem & Tax Plan

When it is time to redeem your investment, go smartly,

1. To avoid the exit load, redeem accordingly. 
2. The tax rate on long-term capital gains on equity funds is 12.5% % for long term over and above 1 Lakh, and for the short term, that is less than a year, it is 20%. 

Wrapping Up

Choosing mutual funds to make your dream home is one of the effective and smart strategies but depending on your budget and time horizon choose your fund carefully. Along with this, don’t forget to start investing in an emergency fund, to make a safer investment decision.

Please share your thoughts on this post by leaving a reply in the comments section. Contact us via Phone, WhatsApp, or Email to learn more about mutual funds, or visit our website. Alternatively, you can download the Prodigy Pro app to start investing today!

Disclaimer – This article is for educational purposes only and does not intend to substitute expert guidance. Mutual fund investments are subject to market risks. Please read the scheme-related document carefully before investing.