You dream of unlocking the door of your own home and do the various things you can’t do in a rented home. Since most Indians are now buying their homes in their late 20s and early 30s* with home loans, you need to start saving early for your home down payment. This means you typically have 3-5 years to save the money and need to invest in relatively lower risk investments that combine growth with inflation combat capability and tax efficiency. This is unlike investing for longer term needs where you may invest in higher risk - higher return investments, especially equity-oriented investments such as equity mutual funds for 8-10 years or more. So, debt funds can be one of the better investments that can be considered when saving for a home down payment.
Debt funds for home down payment Consistently performing debt funds perform over different time periods, like one, two and three years and since inception. The capital gains made in a period of more than three years, are classified as long term capital gains. These gains get inflation indexation benefits where the cost of acquiring the debt fund units get enhanced in the same proportion as enhancement in the inflation index during the investment period. Thus, the capital gains for taxation purposes become lesser. You also pay 20% long term capital gains tax which much lower tax payout for those in the highest 30% tax bracket. The latter is true for interest income from traditional saving/investment options. The twin advantage of tax treatment of capital gains over periods of 3-5 years provides debt funds an edge over traditional options since they can also typically provide higher returns.
Get the FMP advantage There are a couple of routes of investing for your home down payment through debt funds. Here, we will focus on how you can use a category of close-ended debt funds called Fixed Maturity Plans (FMPs). The investments in FMP mature at a predetermined date which could be one, three, five or more years. The money in FMPs is invested in debt investments till their maturity and the investments are typically made in government securities, corporate debt and money market instruments. This ensures that the volatility is low and insulates them from any adverse impact of changes in interest rates that could typically impact debt funds. This, along with the usual debt fund tax benefits, could make them ideal candidates as investments for home down payment. They also tend to provide an edge over other traditional instruments since they can help earn higher returns. Of course, the returns from traditional saving instruments may be more stable while FMP returns are market-linked and can only be indicative at the time of investment.
Using FMPs for home down payment Depending on when you need the money, you could regularly invest in FMPs of terms greater than 3 years so that they mature around the time you need the money. For instance, if you need money after 4 years, you could begin investing in a FMP of the same tenure. Subsequently, the terms of FMP investments will get shorter. You can supplement your regular FMP investment effort with investments of lump sums that keep coming to you periodically in the form of annual bonus, refunds and stock option payments, among others.
While investing in FMPs, you may opt for the growth option if you don’t need regular income. In case of delay in your home purchase, you can stay invested in the FMP for another 1-2 years. Since it is mandatory for FMPs to list on the stock exchange, you can liquidate your FMP investments during an emergency. However, it is best left undisturbed since you wouldn’t want your home purchase to get impacted. Also, FMPs are typically thinly traded and could be even traded at a discount at the time of your need.
Given its various features, there are distinct advantages FMPs provide to any person saving for a home down payment in the 4-5 years. In many ways, FMPs can be your financial key to unlock the door of your dream home.
* Hindustan Times: https://www.hindustantimes.com/pune-news/age-of-average-homebuyer-has-come-down-to-28-from-42-says-chief-of-credai/story-8kFbXSq705m7VSDZRYeXJK.html
Mutual fund investments are subject to market risks, read all scheme related documents carefully.