1
Almost all Indians would wish to own at least one house of their own, and this often leads them to think that real estate can also be an investment option. The difference between equity and real estate, however, is that the equity cycle is short and people tend to associate it with volatility. Real estate tends to have longer performance cycles and as a result, is not associated with volatility. Consequently, real estate and gold occupy almost 77 per cent of household savings. Since real estate in India comes with some of the most expensive prospects in the world, relative to the earnings of the populace, a home loan is a popular option. However, they also mean tying ourselves down to EMIs for the next 20 years. The average age for borrowing such a loan is around 30, when one has a family. Expenses begin to mount soon after, and the instalments leave little scope for savings. But what if we gave you a way to recover the interest you pay to the home loan company? For instance, you take a loan of INR 25,00,000 and the EMI, at 8.4 per cent interest (assumed for a 20-year loan), works out to INR 21,538. In effect, you end up paying INR 51,69,120 to finally own the house, paying INR 26,69,120 as interest - which is actually more than the principal borrowed! Every home loan borrower endeavours to avoid defaulting on loan EMI to avoid the wrath of a Housing Finance Company. What if you extended the same discipline beyond EMIs and tried to recover the interest you pay over the loan term? The day your loan gets disbursed, start a monthly Systematic Investment Plan (SIP) in the mutual fund scheme of 0.15 per cent of your loan principal. In the case illustrated, let’s say you sign up for a monthly SIP of INR 3,600 (INR 3,750 is 0.15 per cent of the principal) in a diversified equity fund. You let the SIP continue for 20 years. If we assume a modest return of 12 per cent in equity SIPs, then in 20 years you would have invested INR 8, 54,968. The valuation of your investment would then be INR 35,24,089. The capital appreciation of INR 26,69,121 on your SIP investment offsets the interest on the home loan. Thus, some discipline in setting aside a small portion of your income along with your EMI payments can go a long way in offsetting the interest payment made over the years. If you plan to borrow for buying a house or if you already have a home loan, start an SIP and avoid being burdened home loan interest in the long run. Note: The opinions expressed in this article are those of the author alone and not of HDFC AMC, and should not be regarded as investment advice. Investors should obtain their own independent advice before taking a decision to invest in any securities. Returns are not assured / guaranteed. MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. Home is Where the Savings are Don’t reel under the burden of home loan interest rates. Make a smart investment by opting for a Systematic Investment Plan (SIP). ADVERTORIAL Ms. Shyamali Basu, Senior Vice President & Head - Products & Marketing, HDFC Asset Management Co. Ltd.
