Collecting (and growing) money for property downpayment

POSTED BY Sameer ON December 8, 2010 5:41 pm COMMENTS (14)

 

Hi Manish,

I have been following your blog for a while and using the tips and suggestions given by you and other experts who participate in your forums, I have shortlisted a few MFs. My objective is to use SIPs for the next 5 years with the aim of generating a corpus for using as downpayment for purchasing property.

After calculating current and increasing expenses, current annual commitments, tracking them for almost a year, forecasting my income a bit, I have come to the conclusion that I can safely park around 30K each month for the above purpose. This amount is also in the lower range of EMI that I would pay if I bought a house today – but I don’t have enough for downpayment right now.

Since FD is more appropriate for bulk amounts and I only get access to 30K at a time, I chose SIP. Also, I do not want lockin – if I get a good bonus 😉 and decide to buy in 4 years, I should have access to my money without losing the profit.

I don’t really have a target corpus in mind, this amount and strategy is purely based on what I can shell out right now and the fact that I do not want to put this money at risk (my wife will shoot me since she just wants me to collect the money in a savings account!).

When my income increases, I’ll probably put more money in the fund that is performing better or in another fund.

Selected Funds:

 

  • HDFC Prudence Fund
  • HDFC Balanced Fund
  • FT India Life Stage FoF 40s

 

I wish to put 10K monthly in each of them. I have other shares and Equity oriented SIPs, but I wanted to go for safer funds since I want my capital to be protected. Over 5 years, I ‘hope’ that I will get a fair return and any short term losses will be madeup. 

Questions:

I know that you don’t prefer to comment on individual funds, so I will not ask if my choice is right, I leave that to other forum members *hint* *hint* 😉

Instead, if you could comment on the type of funds I selected or suggest others that might be more suitable, that would be awesome. Of course, if my whole strategy is wrong, do suggest the best plan of action.

Also, what type of return should I expect from these funds? Looking at all the numbers in the sites has me confused; I am unable to predict what is a combined SIP return to expect.

I have a feeling, even the above funds have a moderate risk, are there others that offer similar returns at lower risk?

thanks,
Sameer

 

14 replies on this article “Collecting (and growing) money for property downpayment”

  1. shashank kashettiwar says:

    Sameer,
    What size flat you are aiming for, and what is its price today? Also do you have any kids?

    My guess from the information is a 2BHK flat, priced @ 40-45 lakhs today and you don’t have kids as of now.

    I may be able to suggest a (different )solution if you can provide above info.

    I’m very much impressed with the solution suggested by Ramesh!!!!

    shashank

    1. Sameer says:

      Shashank,

      I’m aiming for a 3 bhk if I can afford it, if not a 2 bhk should be ok – if I were to buy today, I would buy in the range mentioned by you. On the family front, I do have a kid who has just started schooling (nursery).

      Another factor to consider is that I’m the only one earning and partially support my parents who are long since retired.

      Looking forward to your approach 🙂

      Sameer

  2. sidrana7 says:

    Sameer,

    Additionally with 60 individual monthly inputs your chances of getting shot by wife are far distant, as compared to single lumpsum investment.

    So in my personal view you are in better position to take higher risk with equity only 60 individual investments, or much better you can make yourself shotproof by using VCA method od guaranteeing returns. If its harder to sell riskier approach to your better half then VCA strategy can be sold to her as guaranteed discount sale to her.

    Now thats tongue in cheeck. I bear no value in your gain or worse pain.
    Good luck mate.
    Sid.

    1. Sameer says:

      Thanks Sid. What you are saying makes sense, across 5 years, most of the risk should be neutralized.

      Also, good suggestion there on VCA! This is new for me 🙂

      Found this comparison of the various options
      http://www.valueresearchonline.com/story/h2_storyview.asp?str=15742

      I did some reading up on VCA and found a Benchmark scheme called VIP which uses this method:
      http://www.benchmarkfunds.com/Documents/VIP_onepager.pdf (overview)
      http://www.benchmarkfunds.com/Documents/VIP_SPCNX500Fund.pdf (details)

      Any feedback on this VIP scheme?

      The main and new consideration for me is to figure out if I can absorb the spikes in the amount as and when they come – since the monthly amount is not fixed.

      Sameer

      1. sidrana7 says:

        Sameer,

        Benchmark funds provides there own funds. To be honest I have no idea on their VIP scheme. In VCA investment you are the one calling shots on targets and installments. As well the investment fund. The user friendly platform is more essential for the VCA, like electronice fund transfers and etc.

        Also check fundsindia website. they have this VCA feature with auto calc on monthly payments and that too electronic. Check their site for details. and you have chocie of wider funds across various AMC’s. I have personally not used their financial service but have account with them hence sharing what I saw online.

        Recon you have 12 x 30k = 360k corpus amount per annum.
        Just did a quick rough calc 20% return on 360k (lumpsum) with at year end = 72k
        So 360k-72k = 288k/12 equals 24k as monthly input to VCA. Obviously you will have some extra cash sitting idle each month to be used to absorb the increase in the monthly input. There may be good ways to put this cash in some ultra short liquid low cost (debt?) funds.

        That was very crude and simple calc. Advise spending some more time with finer details and share with us later if found useful.

        not a tip, someone on my twitter timeline has been talking about having 5% more returns on junior nifty vca investment.(pinch of salt please.)

        Very good luck with your plannign ahead. smart thinking.
        cheers
        Siddharth

  3. sidrana7 says:

    Sameer,

    Personally I must say, If you are going on monthly input then SIP for equity only should be the way to go for.

    VCA investment towards a target return can also be a good idea with your plan of investment. Junior nifty may prove more helpful than the nifty itself.

    As this is not a lumpsum investment I do not prefer debt instruments at all.

    If you want higher return or moderate risk should be taken. Why not as its monthly investment and not a one time lumpsum. So you get 59 monthly sip’s to average out 1st sip.

    Just my personal view, have it with plenty pinches of salt.

    Best regards
    Sid.

  4. Thanks for reminding me Manish. Agree to this.

  5. Siva

    Please make sure you do not violate the forum policies : web site to get answers to mutual funds related problems and suggestions . You cant put your contact details or give any message which invites people to contact you . Violation might lead to a BAN

    Manish

  6. Ramesh Mangal says:

    100/(1.08^4)=75
    100/(1.08^3)=80
    100/(1.08^2)=85
    100/1.08=92

    Keeping with a view of 4 years (not 5 years).

    Put 75% money (22k) per month in a debt fund, while rest in blue chip fund for 1st year. Same with 80,85,92 percent for 2nd, 3rd, and 4th years.

    my suggestions for debt fund= birla dynamic bond fund. blue chip fund= franklin blue chip fund.
    One final suggestion. Put the strategy in writing before employing it, so that you stick to it. Changing market scenarios may cause you to re-evaluate and change to riskier strategies!

    Ramesh

    The principle= the debt portion of the money @8% will give you a capital protection. while the blue chip fund will give a very reasonable kicker.

    1. Sameer says:

      Thanks Ramesh.
      I was earlier confused about why you suggested 4 years and not 5 – but I think it’s because for the last year money should be 100% in debt, right?

      It sounds interesting. Could you guide me on how to change the SIP amounts mid-way, is that possible? Or is it buy and sell?

      When I start the SIP in the debt scheme, what tenure should I start with? 1 year or 4 years?
      Also, if I were to find suitable schemes in the same AMC, would it be easier to set it up as a STP from blue chip to debt fund? I guess that would that be more expensive (exit load per transaction) than yearly.

      Good suggestion on keeping it in writing – the current one I have is already in a spreadsheet with the amounts that will go in each fund. I guess I will add versions to it and set reminders for myself to make the changes on each anniversary.

      One question – considering that I am putting 30k * 12months * 4 years = 14,40,000
      How much of a profit should I expect following your strategy?

      I checked out the STP article by Manish and the comments suggest HDFC Flex STP
      http://www.hdfcfund.com/InvestPlans/ContentDisplay.aspx?ReportID=03B44AF6-AFE7-4F58-A220-6D81DCE80B2C
      Do you think this is a better option than regular STP? Which funds to go for in this?

      Sameer

      1. Ramesh Mangal says:

        @Sameer

        I kept it at 4 years so that the final year is only in debt. You have rightly assumed that.
        Second, the proposed plan does not require you to do any STP or balancing.

        Do yearly SIPs in the proposed schemes or equivalents in the given percentages. Just to be more clear, for the first year the debt portion i.e. 75% of the money @8% per annum will give you 100% at the end of 4 years = your capital is protected, while the equity portion will give you the extra return! Same for the rest of the years.

        This scheme is just a method to illustrate that you can have a goal oriented, capital-protection strategy.

        Cons of the above method:
        1. If the equity market explode upwards. Result – you will be disappointed why you did not put your money in equity fund or the original strategy (equity oriented funds) you thought.
        2. Debt markets may not be able to give you an 8% return and the equity markets tank in the 3rd and 4th years. Your wife will shoot you!
        3. Midway, you change your strategy. The new strategy works – goto result of point 1. It does not work – goto result of point no. 2.

        Be intelligently flexible. Do not lose sight of your goals. Control greed/fear.

        Ramesh

        1. Sameer says:

          Thanks for the clarifications Ramesh. This sounds like a fair strategy. I’d be happy if the returns can pay for even part of the fancy interiors my better half is planning 😉

  7. HI Sameer,

    Considering your future requirement and risk appetite, you need to have a conservative portfolio with an expectation of modest rate of growth.

    So, you can have 80 (Bond) + 20 (Equity) mix in your portfolio.

    Thanks – Siva

    1. Sameer says:

      Thanks Siva. Do you have any suggestions on which schemes will be suitable?

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