Money
How an IT couple realized their dream of a larger home
Summary
- Keshav Prasad and Mohini Latha used their own funds, and a home loan which was also tax-efficient
Moving to a larger three- bedroom flat with their two children is something that Gurgaon-based IT professionals Keshav Prasad and Mohini Latha had been planning for a long time. Part proceeds from the sale of their old flat, along with a home loan, helped them achieve this—they moved into their new home in 2015.
Building a corpus for their retirement and for their children’s education are the two key long-term goals of the 45-year-old couple. With this in mind, they have been investing largely in debt products and to some extent, in equity. Their risk perception has, however, undergone some change after having engaged a financial advisor for the last eight years. From nil exposure a few years ago, equity now accounts for 10% of their current portfolio.
Mint reached out to the couple and their financial guide, Amit Kukreja, a SEBI-registered investment advisor to understand their personal finance journey.
Financing a new home
“We’ve seen most of our friends putting all the money they get from selling their older flat into buying a new one. This leaves nothing for investing for the future," remarks Prasad. Based on Kukreja’s advice, Prasad and Latha used only part of the sale proceeds from their old flat to buy a new one in Gurgaon. The rest was used for building a contingency fund which they felt was necessary, especially given that they both have private sector jobs. Also, taking a loan to part finance their flat purchase is helping them each claim a deduction of ₹2 lakh for interest paid on home loan. According to Kukreja, given this tax benefit and only a 30-35 bps rise in interest rates so far, he is not yet recommending loan pre-payment to them.
Following Kukreja’s advice, Prasad and Latha opted for a home loan interest saver account too, which they have found useful for parking any surplus and, in turn, reducing their interest burden. With this facility, the interest gets calculated on the outstanding loan amount minus the balance in the current account. At the same time, one has the flexibility to withdraw the money whenever needed. But, the rate of interest itself can be typically 50 bps higher than what it would be for a home loan without the interest saver account.
Currently, the couple is paying off two home loans, one taken in 2013 (before they met Kukreja) and another in 2015. The first one was used for buying a flat in their hometown in Andhra Pradesh.
Building a safety net
The IT couple has earmarked the money in the home loan interest saver account along with some debt fund investments as their contingency corpus. This covers them for nine months’ worth of expenses. Normally, people park their contingency funds in fixed deposits and debt funds.
In addition, they have each taken a life insurance cover, and a family floater health policy. The latter is in addition to the health cover provided by their employers. “Amit emphasized on having insurance first and then focussing on building a corpus for our long-term goals," says Prasad. It’s also on Kukreja’s suggestion that they gave up their earlier-bought endowment policies and bought term plans instead. He guided them on how insurance products were not meant to be used as investments for long and short-term goals.
Prasad feels that with the two home loans that they have to repay, and the fact that their corporate health cover will stay only as long as their jobs remain, having adequate life and health cover makes a lot of sense.
Diversification, tax efficiency
Portfolio-wise, while their allocation is still debt-heavy, the couple has moved from investing only in fixed deposits to debt mutual funds (direct plans), making their portfolio more tax efficient. Long-term capital gains (holding period of three years or longer) from debt funds are taxed at 20% with indexation benefit versus fixed deposit interest income which is taxed at an individual’s income tax slab rate. Prasad and Latha no longer hold any fixed deposits and their debt portfolio comprises investments in the Employee Provident Fund (EPF), Public Provident Fund (PPF) and Sukanya Samriddhi Yojana (SSY) apart from debt funds. The two are particular about making their PPF and SSY investments right at the start of the financial year to earn the maximum possible interest.
Their equity investments (only 10% of their portfolio) are spread across large cap, equity linked savings scheme (ELSS) and multi-cap funds, and the national pension system (NPS). “While we do want our investments to grow and beat inflation, we don’t want to risk losing our principal," concludes Prasad.
