BackFestival season home loan offers: Are they worth it?
Fixed Obligation to Income Ratio should not exceed 50% of take home income. Investment in real estate requires patience and has impact on liquidity. Also, home loan is a long-term commitment and it is thus crucial to assess medium term cash flow needs before deciding to buy a house
PremiumI am 38 and my current take home is ₹1.5 lakh per month. My wife, who is a home maker, our 5 year old daughter and my mother make up our family. I have an EMI of ₹51,000 for my existing home loan of ₹20 lakh. The balance loan tenure is 5 years. I am also paying annual insurance premiums for my car, health cover and term plan to the tune of ₹40000. Since 2012, I have been investing in mutual funds and have built a corpus of ₹25 lakh. I can afford another EMI of ₹25,000 after paying for my current essential expenses.
I have multiple queries. One, with so many festival offers and lowest home loan interest rates, should I buy another house? Two, I have a very positive MF portfolio. With record market peak, should I book profit and transfer my savings to debt funds or align part of profits for home down payment? Three, how should I review and rebalance my overall portfolio. Four, I want to save for emergency, daughter's higher education and do retirement planning.
Name withheld
Answer by Raj Khosla, managing director, MyMoneyMantra.com.
Regarding purchase of a second house, make sure your Fixed Obligation to Income Ratio (FOIR) is not over 50 % of take home income. An investment in real estate requires patience, and has a substantial impact on liquidity. Also, a home loan is a long-term financial commitment and it is thus crucial to assess your medium term cash flow needs prior deciding to buy a home. Investment in market linked options can entail higher returns.
With markets at astronomical levels, you must partly book profits according to your risk appetite. Since you are getting tax benefits on existing home loan and can also afford EMI of ₹51000, it is recommended to remain invested in mutual funds. Book part profits and explore option of STP (Systematic Transfer Plan) i.e. invest booked profits in debt funds and start systematic transfer in diversified equity funds. Part pre-payment of home loan is certainly a good idea.
Your portfolio is well-diversified (congratulations) with a bouquet of financial products. Investment and risks are both covered by mutual funds and insurance policies. To start the review, you should evaluate tax planning & availability of adequate liquidity in the portfolio. It is important to assess your cash flow requirements along with short term, medium term and long term goals. It’s a good idea to consult a professional financial advisor.
Review your portfolio once in every three years. Focus should be to build an emergency corpus for the short term and for creating wealth for kid’s education; marriage and retirement planning in mid to long term. Given your age & financial requirements, you should have a moderately aggressive investment plan, i.e. 60:40 of equity and debt contribution. Align additional investment of ₹25,000 towards equity mutual funds. Most importantly, review your existing risk cover i.e. health and term plan. Make sure you are adequately (be mindful of outstanding home loan) covered for any medical or life threatening emergency.
(Have personal finance queries? Send an email to mintmoney@livemint.com)
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