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Every person wishes to have his own home where there is both peace and stability. Whether you are looking for a modern flat in Gomti Nagar, Lucknow, looking at the upscale societies of Delhi-NCR or buying land in a tier-II city and building your own house, today the base price of a house in a good locality can easily reach around ₹ 1 crore. Amidst the skyrocketing property prices, the biggest question that arises is whether such a huge fund can be created only by regular savings or bank FD. The simple answer is no, because inflation and rising real estate prices run faster than traditional savings instruments. In such a situation, Mutual Fund Systematic Investment Plan i.e. SIP emerges as an effective weapon, which can convert your small investments into a huge fund over time. If you have set a goal of buying your own home 10 years from now, then it is very important to understand the correct financial mathematics of how to complete this journey without getting burdened with huge debts.
When you set a time period of 10 years, it is considered a medium to long term horizon in personal finance parlance. Equity mutual funds have historically delivered average annual CAGR returns of 12% to 14% over a 10 to 15 year horizon. If we go by a balanced and practical 12% annual return assumption, to accumulate ₹1 crore you would need to start regular SIPs of around ₹43,000 to ₹43,500 every month. The total investment from your pocket over the entire 10 years will be around ₹52.2 lakh, while the magic of compounding will give you a net profit of around ₹48 lakh, taking your total corpus to cross ₹1 crore. On the other hand, if your portfolio is a little more aggressive, with the right balance of mid-cap and flexi-cap funds and manages to generate annual returns of 15%, your monthly liabilities come down significantly. At a potential return of 15%, you will have to do a SIP of around ₹36,000 every month. In this case, your actual investment in 10 years will be around ₹43.2 lakh and the estimated return you will get will be around ₹57 lakh, which will directly make your dream of ₹1 crore come true.
If your current salary or income is not such that you can invest a hefty sum of ₹ 40,000 or ₹ 43,000 directly from the very first month, then there is no need to despair. This is where the modern formula of ‘Step-up SIP’ comes in handy. Every year, as your career progresses, you get promoted or your business income increases, you can increase your investment installment by 10% annually. If you opt for a 10% p.a. step-up and expect returns of 12%, you can start your journey with an initial SIP of just ₹25,000 to ₹26,000 per month. ₹ 26,000 in the first year, ₹ 28,600 in the second year, ₹ 31,460 in the third year—in this way, even if you keep increasing only 10% every year, you will easily touch the big landmark of ₹ 1 crore by the end of the 10th year. This method not only takes off the initial pressure on your pocket, but also gives you the freedom to create wealth with discipline while staying within your budget.
Most people consider taking a bank home loan of 80% to 90% as the easiest way to buy a house, but do not deeply understand the financial losses hidden behind it. If you take a home loan of ₹80 lakh for 20 years at an interest rate of 8.5% to buy a house worth ₹1 crore today, your monthly EMI will be around ₹69,400. By the time 20 years are over, you will have paid around ₹ 86.6 lakh as interest only to the bank against the principal amount of ₹ 80 lakh, that is, in total you will be out of your pocket more than ₹ 1.66 crore. On the contrary, if you do a disciplined SIP in a planned manner for 10 years, after 10 years you will have a cash fund of ₹1 crore ready in your hand. With this, you can either buy the entire property directly without any loan, or you can take a very small loan by paying 60% to 70% down payment, due to which your monthly EMI burden will be negligible and you will be saved from getting stuck in the trap of bank installments throughout your life.
To create a corpus of Rs 1 crore, it is not enough to just invest money in any fund, but it is mandatory to create a balanced and diversified portfolio. For a time frame of 10 years, you can divide your total monthly investment into three or four categories, in which 40% can be invested in large cap or large and mid cap index funds, 35% in flexi cap or multi cap funds and the remaining 25% in good quality mid cap funds. This allocation provides strength to withstand market fluctuations and generate inflation-beating alpha returns over the long term. Along with this, an important aspect should also be remembered that the property which is worth ₹ 1 crore today, after 10 years due to real estate inflation of 5% to 6%, the price of the same level of house may increase to ₹ 1.6 crore to ₹ 1.7 crore. Therefore, while making your financial strategy, do not limit your target to a flat ₹1 crore only, but keep topping up your savings capacity every year so that inflation does not come in the way of your dream of owning a house.
The biggest rule of investing in mutual funds is to start moving your profits out of equity risk as you get closer to your goal. When 8 years have been completed in your 10 year journey and you start having a strong fund, then do not leave all the money open in the stock market. In the 8th or 9th year, you should gradually start shifting your equity funds to liquid funds, ultra-short term debt funds or safe bank deposits through a systematic transfer plan i.e. STP. The advantage of doing this is that even if there is a major correction or recession in the stock market just before the 10th year, the corpus of ₹ 1 crore deposited to buy your house will be completely safe and you will not have to wait for the market to improve to finalize the deal of your choice. Only the right financial discipline at the right time can make a common businessman or businessman the owner of his own home without any debt.