Investing in mutual funds versus buying a house

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I am 35 years old and working for a PSU wherein I need to stay near my work location which is far away from the cities where I would like to settle down by the time I retire.

My query is, should I buy a home now in my preferred city or should I invest money in mutual funds to build a corpus for buying a home 20 years down the line. If I buy a flat now and rent it out, it will become old by the time I move in. If I don’t buy, I may have to spend a large chunk of retirement corpus for buying my dream home.

Name withheld on request

It is always a difficult choice to make when it comes to buying a home today or later considering that you may not use the purchased home for years. A lot depends on the location where you want to buy your retirement home and how the prices have increased in the past. Real estate growth in India is subjective and the increase in prices not only differs from city to city or locality to locality but also for flat or plot. Here are some of the points that you should consider before deciding your next move about buying your retirement home.

• The real estate prices and the rental yield in many cities and towns have been stagnant for years, how it has been for the city where you want to buy a home

• The down payment and loan amount you have to take for this property, even though the interest rate is low at present, may not continue to be this low in future years.

• Your preference over the kind of home may change till the time you retire

You have more than two decades to retire and if you start investing in equity mutual funds for your retirement as well as your retirement home from today, you should ideally be able to build a reasonable corpus for both these goals. The approximate cost of the property at the time of retirement based on today’s price and potential price growth can help in evaluating the future cost of the home. When you invest in equity mutual funds every month for a long-term goal you may consider a 10% growth every year. So for your calculation purpose, you may calculate the corpus by assuming a 10%p.a. growth in the value of your down payment and monthly EMI for 20 years if you invest instead of buying a home today. In my view, if the accumulated investment amount is higher than the future cost of the property you can invest in equity funds and then buy your home when you are nearing retirement as it not only gives you the amount to buy your home at that time but also helps you decide what kind of house and where you would like to settle in future as the world keep progressing every day. When you follow this approach, you can review both these numbers regularly and then take a call in future as well.

On the other hand, many people prefer to build their retirement home during their work life as they find it more comfortable with the help of a home loan and a steady income along with the tax benefits. This can be helpful if you are very sure of where to settle post-retirement and do not want to carry the pressure of buying a property near your retirement. As said earlier, it is a subjective decision but some of the above points and calculations can help you make a more informed decision.

Answer by Harshad Chetanwala, founder MyWealthGrowth.com

(Have personal finance queries? Send an email to mintmoney@livemint.com)

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