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If an investor asks any financial professional if she should continue to rent a house or buy a new one, chances are that the professional will recommend renting.
While renting a house could be more prudent decision, buying a house is an emotional decision for many and we all know emotion overrides logic.
Instead of stopping them from buying their dream house, MFDs/RIAs should encourage investors to invest at least 10% of EMI in mutual fund through SIPs.
This is simple yet effective formula to pay EMI and build a healthy corpus.
For instance, if your client has bought a house by availing loan of Rs.1 crore for 25 years, her monthly EMI would be around Rs.68,333 considering the interest rate of 8.20%.
Even if she invests just 10% of the EMI amount which is Rs.6833 through SIP by considering that her total EMI outgo is Rs.75,166 (Rs.68,333+Rs.6833), she will be able to accumulate Rs.1.30 crore at a CAGR of Rs.12%.
Here is the simple illustration on various scenarios starting with loan amount of Rs.10 lakh:
Meanwhile, in case of unfortunate demise of the borrower before the loan tenure, his family will be able to repay loan amount from term insurance and use this corpus to achieve financial goals.
Chanchal Wankhede works with a leading AMC. The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.
