Money Management Tips: Dreaming of owning a home is common, but the financial reality in places like Delhi-NCR often requires a substantial budget, typically around Rs 50 lakh for a 2BHK. Many middle-class individuals exhaust their savings to purchase a house, often resorting to home loans, which can become lifelong commitments. However, is buying a house always the best option, or could renting be more financially prudent? Let’s explore how strategic mutual fund investments through Systematic Investment Plans (SIPs) can potentially offset the costs associated with home loans.
Calculation of Home Loan
Assuming a home loan of Rs 40 lakh (80% of the property’s value), with a fixed interest rate of 8.5% for 20 years, the resulting Equated Monthly Installment (EMI) amounts to Rs 34,713. Over the loan tenure, the interest paid would sum up to Rs 43,31,103, bringing the total repayment to Rs 83,31,103.
Recovering Costs Through SIP
To mitigate the financial impact of the home loan, individuals can initiate mutual fund SIPs alongside their EMIs. It’s recommended to allocate 20-25% of the EMI towards SIPs. For instance, if the EMI is Rs 34,713, approximately Rs 8678 can be invested in SIPs monthly. Assuming an annualized return of 12%, the SIP investment over 20 years would amount to Rs 20,82,480, potentially yielding long-term capital gains of Rs 65,87,126, resulting in a total corpus of Rs 86,69,606.
Benefit of SIP Plus Home Loan EMI
By simultaneously servicing the home loan EMI and investing in SIPs, the total investment over 20 years would be Rs 1,04,13,583. Comparatively, the corpus generated from SIPs alone would exceed the entire home loan amount. Consequently, the effective price of the house would be significantly lower than the initial Rs 50 lakh.
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