A reader asks, “I am a 27-year-old NRI with a current mutual fund portfolio of Rs. 12 lakhs. We want to buy a home. My father wants me to take out a loan immediately. I want to build my MF portfolio to 40 Lakhs within the next three years. Then, take out a home loan for Rs. 50 lakhs and use the profit from MF to partially pay back (at least 50% – say 25K) the monthly loan payment. And At the same time, use my regular income to increase my MF portfolio”.
“Is it possible to book a profit of at least 25 thousand every month after I build my MF portfolio of 40 Lakhs? (Except during market downturn) Am I underestimating my returns or overestimating?”
Technically it is a feasible proposition. Half the EMI of an Rs. 50 lakh loan can be serviced by withdrawing Rs. 25, 000 from a mutual fund corpus of Rs. 40 lakhs. This withdrawal can be made only if the monthly return is only 0.5% or more.
However, any market-linked product withdrawal will involve some gains and some principal, so that continuous withdrawals will erode the corpus. Even if you decide to withdraw in such a way to keep the value close to Rs. 40 lakhs at all times, the time elapsed is an equivalent erosion. There is no way around this!. Also, see: How to redeem only profits from mutual funds?
However, just because something can work does not mean we should choose it. By your estimate, you are in a position to grow your portfolio from Rs. 12 lakhs to Rs. 40 lakhs in three years with additional investments and market gains.
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This means you should handle the full EMI from your salary and continue investing in mutual funds (at a lower rate). At 27, we agree with your father that this is what you should do.
Using the accumulated corpus to pay off your home loan when you can easily do it with your salary is both a waste of time and wealth. That corpus should be nurtured with more investments and allowed to grow untouched unless there are emergencies.
We recommend working with a SEBI registered fee-only advisor to determine how much you need to invest for financial independence and other goals. Then find out how much your investment will be affected by the home loan EMI.
As discussed recently – When should I get a home loan? How do we decide this? – it should be ‘ok’ as long as you can continue investing at least 10% of your take-home pay for your long-term goals while servicing your loan.
In summary, as long as we can reasonably balance EMIs with long-term investments, it would be better to service a debt early in life, and jack up investments later when our income is higher and make up for the lost time. It is not advisable to redeem from a market-linked corpus for immediate use. It is best left alone to grow untouched for as long as possible.