22 Jan 2018 15:06 IST

What it takes to renovate your home

To fund the remodelling, investing monthly surplus in mutual funds will be useful

Buying, building or redoing a home entails huge investment. One needs to plan the finances early on.

For Mumbai-based Kiran Kumar, 23, who completed his Masters in Business Administration and joined a multinational last year, refurbishing the family’s ancestral home in which they currently reside has been his long-cherished dream.

His father, Anil Kumar, 55, works for a PSU and his mother is a homemaker. Kiran Kumar’s parents take care of the family’s monthly expenses. The family has a floater Mediclaim policy worth ₹5 lakh. Besides this, Kiran Kumar has a term and Mediclaim policy provided by his employer.

Kiran Kumar’s monthly net income is ₹50,000 and he spends ₹8,000 every month on transport, food and other miscellaneous expenses. He purchased an apartment in Mumbai suburbs last year and took a home loan of ₹20 lakh to fund the same. He currently pays ₹19,695 as EMI.

The apartment fetches him rental income of ₹7,000. He recently commenced systematic investment in a few diversified large cap-oriented schemes. He currently invests ₹10,000 every month.

Kiran Kumar also has ₹3 lakh parked in a bank fixed deposit.

Modification moves

The house Kiran is looking to refurbish is in his father’s name and Kiran Kumar will inherit the property. “While I don’t want to make material changes , we need to make some modifications to make it comfortable for my parents”, says Kiran Kumar. He plans to do the modification three years from now and anticipates spending ₹15 lakh for the same. “I don’t want to fund it through a loan as I have an ongoing loan and hence want to save money”, he explains.

Kiran Kumar currently saves ₹19,305 every month. If he invests this in a diversified large cap-oriented mutual fund scheme along with the ongoing SIP of ₹10,000, he should have a corpus of about ₹14 lakh by the end of the third year. This assumes an annualised return of 12 per cent on equity mutual fund schemes and an annual increase of 10 per cent in the investible surplus.

Investment options

Given that he does not have any other financial commitments in the near term and his father is employed and has adequate savings, Kiran Kumar can move ₹1 lakh from FD into equity mutual funds and retain ₹2 lakh in the fixed deposit.

Assuming annualised return of 12 per cent, the investment will be worth ₹1.4 lakh by the end of the third year. This should help him meet the shortfall of ₹1 lakh towards home refurbishment.

Kiran Kumar can consider large cap-oriented schemes with a good track record such as Aditya Birla Sun Life Frontline, ICICI Prudential Focussed Bluechip and Invesco India Growth Plan that have delivered 13-16 per cent annualised returns over the last three years.

(The writer is co-founder, RaNa Investment Advisors. The article first appeared in The Hindu BusinessLine.)