Balancing between taking a Home loan and dipping into personal reserves

In terms of financing a home, individuals often find themselves at a crossroads, torn between taking out a substantial home loan and tapping into their personal reserves. Achieving the right balance is vital since relying largely on loan can lead to an increased debt burden, while depleting reserves entirely may leave one financially vulnerable in unforeseen circumstances.

Let's consider Gurvinder's situation as an example. If he had bought a home worth Rs 1.5 crore in Jan 2007 and sought advice from his financial advisor, who presented two options:

Option 1 (Lower loan component) - Assuming a 30% down payment and initiation of a SIP in Nifty 50 TRI

Option 2 (Higher loan component) - Assuming a 15% down payment and investing the remaining amount in Nifty 50 TRI

Both options are suitable from Gurvinder’s perspective, provided he avoids common pitfalls. If not invested in Option 1, there may be a tendency to overspend due to lower EMIs, while if not invested in Option 2, overspending on interiors against the lower down payment requirement may occur.

In conclusion, Gurvinder’s approach to financing a home highlights the importance of financial planning. Balancing between a home loan and personal reserves, coupled with wise investment decisions, plays a pivotal role in ensuring long-term financial stability and success. The options demonstrate the potential benefits of various investment strategies, emphasizing the need for individuals to carefully assess their financial goals and risk tolerance when navigating the path to home ownership.

Source: MFI, Data from January 1, 2007 to February 29, 2024.

Disclaimer: SIP is invested on the first business day of every month. Return of Nifty 50 TRI in Lumpsum and SIP are 11.80% (CAGR) and 13.22% (XIRR) respectively for the period. The above calculation is for illustrative purposes and should not be construed as a promise on minimum returns and safeguard of capital. Past Performance may or may not be sustained in future and is not a guarantee of any future returns. Due to the personal nature of investments and financial planning, investors are advised to consult their Mutual Fund Distributor / Registered Investment Advisor.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.