When investing in real estate as an asset class, be aware of risks and returns

You need to earn over and above the borrowing cost to generate a net positive return

I am 30 years old and my spouse is 28 years old. Both of us work in public sector banks. Our combined gross monthly income is Rs1.20 lakh and we have no dependants. We have term insurance of Rs1 crore each and a health cover of Rs13 lakh. We save 60% of our gross income and invest in National Pension System (NPS), systematic investment plans (SIPs) and recurring deposits (RDs). We want to buy a flat worth Rs60 lakh for investment purpose. We will get a Rs50 lakh bank loan at simple interest of 7.10%. We will get a rental income of Rs14,000. Please advise.

—Ankit Ahuja

You have been doing good financial planning and ticking the right boxes. You have adequately life cover for yourself and your spouse as both of you have a cover that is seven times your annual income. Likewise, you also have health insurance cover. But consider increasing the health cover every few years as the inflation cost of medical care in India is rising rapidly. The same also holds true for life cover and the rationale here would be as and when your financial responsibility increases.

For investments, you have a good spread of NPS, SIPs and RDs. Now you also want to consider real estate as an investment asset class. Like any other investment product, you need to be aware of the risk associated with the asset class and the expected return. As you also plan to take a loan for more than 80% of the value of the asset, you need to be aware that the targeted return should be equal to 7.10% to break even (with the cost of borrowing) and you need to earn over and above the borrowing cost to generate a net positive return. And yes, you can include the rentals; the yield on the same is 2.8% before taxation. Hence, if real estate grows by 14% annually, your net return is actually equal to a bank FD return. And this is when other costs like registration, broker fees and other miscellaneous costs are not included.

I am in the first year of my college and earn close to Rs25,000 every month through freelancing. I already have about Rs2 lakh saved in my account. I will start working in 2020 and save all my salary. I wish to go abroad for my Masters in 2024 and want to sponsor it myself. My estimate is that I will have close to Rs28 lakh without investing anywhere. I wish to raise Rs45 lakh by 2024-25. Please suggest a roadmap for the same.

—Avinash Chand

It is indeed good to hear your dedication towards saving for your higher education corpus. Firstly, the Rs2 lakh you have saved needs to be invested. Do keep a buffer of Rs50,000 equal to two months of your current income as funds available at call, i.e., as a contingency fund, and this can be kept even in a bank fixed deposit or in a short-term debt mutual fund. The balance amount of Rs1.50 lakh can be invested in the equity asset class as you have an investment horizon of about six years.

Consider a combination of large-cap and multi-cap funds. The said investment can be done in a staggered manner via systematic transfer plan, i.e., the funds are first invested in a debt ultra short-term fund from where a fixed amount is transferred to the designated equity fund at a fixed periodic interval of, say, 7 days, 15 days or 30 days. Doing so helps in enabling rupee cost averaging and helps in reducing overall volatility.

A similar pattern can be used for your monthly savings, which can be invested not only in large- and multi-cap funds but also in mid-cap funds via SIP.

Surya Bhatia is managing partner of Asset Managers

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