Q. I have Rs 1 crore and plan to purchase a house worth the same amount. I prefer to finance it through a loan rather than paying cash. Could you guide me on how to invest this Rs 1 crore to cover the loan payments, including interest, and also generate additional income from investments?
For purchasing a residential property of Rs 1 crore through a home loan, you would have to make a down-payment of at least 25% of the property’s value from your own funds. This ratio can also increase depending on the credit risk assessment by the lender. So only the rest of your surplus corpus, i.e. up to Rs 75 lakh, would be available for investment.
Only equities can generate sufficient returns to recover your home loan interest cost as well as leave you with additional returns. But since equities can be very volatile over the short term, you should not solely depend on the returns from equities to repay your home loan EMIs.
I would suggest you repay your home loan from your monthly income and invest the surplus corpus as a part of your overall investment portfolio. Banks/HFCs usually prefer loan applicants whose total EMIs, including the EMIs of their proposed home loan, are within 50-55% of their monthly income. You have not disclosed your current monthly income or if you have existing EMIs, but in case you are falling short here, you would have to make higher down payments and/or opt for longer tenures.
Coming to your investments, you can split your total surplus corpus after making the down-payment between equity, fixed income and gold related instruments in the ratio of 7:2:1.
For your equity fund portfolio, you can spread your investments equally across flexicap funds, large cap funds and multi-asset funds through SIPs over 18 months. You can consider the direct plans of Parag Parikh Flexi Cap Fund for the flexicap category; ICICI Prudential Bluechip Fund and HDFC Top 100 Fund for the large cap category; and ICICI Prudential Multi Asset Fund for the multi-asset category.
To save income tax under Section 80C and earn tax-free interest income, invest up to Rs 1.5 lakh in PPF each financial year The rest of your fixed income portfolio can be parked in high yield bank FDs offering annualised yields of 8.5% and above. Some of the small finance banks offering such high FD yields include Unity Bank, Suryoday Bank, Utkarsh Bank, Ujjivan Bank and Jana Bank. For your exposure to gold, you can consider investing in Sovereign Gold Bonds through the secondary market.
Assuming that a home loan of Rs 75 lakh is approved and you pay an interest of around 9% p.a. over a tenure of 20 years, you will incur a total interest cost of Rs 86.95 lakh. Similarly, assuming an annualised return of 10% from your investible corpus of Rs 75 lakh, your corpus should grow to about Rs 5 crore with gains of Rs 4.25 crore in 20 years.
While availing the home loan, opt for the home loan overdraft facility to reduce your total interest cost without impacting your liquidity. In addition to your home loan, your lender will open an overdraft account for you in the form of savings or current accounts where you can park your short-term surpluses and make withdrawals from it as per your requirements. Your home loan interest would be calculated after deducting the account balance in your overdraft accounts from the outstanding home loan amount.
Also ensure to include your home EMIs of at least 6 months in your emergency fund, in addition to your other unavoidable monthly expenses, and park it in high-yield FDs or your home loan overdraft account.
An edited version of this article was published in The Economics Times Wealth on July 8, 2024.