Saving for a home

By Morningstar Analysts |  24-04-19 | 
 

The Morningstar Investment Management (MIM) team provides broad guidelines to readers who have a query.

I am planning to buy a home in Mumbai over the next 5-6 years. The cost of the home will be around Rs 3 crores. Around Rs 1-1.5 crore will be funded by me, the balance with a home loan. My wife and I are planning to save Rs 1 lakh every month over the next 5 years to get that amount. Where must we invest?

- Aarav

For portfolio construction, an asset allocation-based approach should be followed as it is one of the key determinants of the portfolio’s performance, in terms of risk and return. A suitable asset allocation is typically based investment horizon and risk appetite. Generally, longer the investment horizon and higher the risk appetite, higher would be the allocation to equity.

Considering a horizon of 5 years and assuming a conservative risk profile, you may have an allocation of 30% to Equity and 70% to Fixed Income. You can invest about 25% into large caps and 5% in mid-caps for your equity exposure.

The fixed income allocation of 70% can be across accrual fixed income categories such as Banking & PSU Funds, ST Income funds and Corporate Bond Funds.

As your goal approaches (last 2 years), the allocation should shift around 10% each year out of equity into fixed income. Given the current market scenario post the IL&FS fiasco, it is advisable to invest in Banking & PSU funds, as these have a mandate to invest at least 80% corpus in banks and PSUs, which are safer bets from a credit perspective.

Investing Rs 1 lakh per month, as per asset allocation indicated above, should enable you to reach Rs 73 lakhs at the end of 5 years. If you can increase your SIP amount by 15% annually you may reach very close to 1 crore (Rs 97 lakhs).

The corpus amount has been computed assuming equity market returns of 12% per annum and fixed income returns of 7% per annum.

I am 55 years old. I have held investments in mutual funds over the past 10+ years. I am interested in investing through SIPs in those funds investing globally, either feeder funds or FoFs or direct. What is the best method to choose from and for how long?

- VV

From a fundamental diversification perspective, which is one of Morningstar’s investment principles, we strongly believe in allocation to international equities as it provides hedge against rupee depreciation and an opportunity to take exposure to varied international economic and fundamental growth drivers vis-à-vis Indian equities & fixed income.

International funds invest in various asset classes (equity/fixed-income/commodities) and may be diversified geographically. Investments should be made in those international markets where one has a high conviction of the growth prospects and with a 5 to 7-year horizon in view. For direct funds v/s fund -of-funds (FoF), you can evaluate the net expense ratio as FoFs have double layer of expenses – one at the FoF level and another at the underlying fund level.

Feeder funds are funds which in turn invest in the ‘master fund’ and are hence a FoF strategy.

Post your query by accessing the Ask Morningstar tab. Our team will endeavor to answer queries ONLY related to mutual funds and portfolio planning from our registered readers.

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