MF QueryBoard

I am a 35 years old man and I want to know among buying a house using home loan and continuing to live in a rented place, which one would be a wiser choice. , I have saved sufficiently for the down payment.
- Vikram Chauhan 

Almost everyone has a dream of owning a house, even if it means to take a loan and pay hefty Equated Monthly Installments (EMIs) for years. As you said, you are currently staying at the rented place, I am sure this would be yours dream as well. Assuming that this will be your first home that you will own, by all means you should go ahead with buying it, as this is for your emotional comfort, which cannot be quantified. 

Nonetheless, keeping emotional part aside, it does not make sense to buy a house; renting one, instead, is a much better option. Should you buy a house by taking a loan or rent a place and invest the remaining proceeds in equity mutual funds, can be explained with the help of the following illustration. 

As we do not know the worth of the home that you are planning to buy and neither do we know the down payment you are able to  make, let us assume that you wish to buy a home worth Rs. 1 crores and you pay 20 per cent, that is, Rs. 20 lakhs as down payment. The remaining 80 per cent, that is, Rs. 80 lakhs, you will pay through home loan, which will have a 20-year loan tenure. Assuming that you take the loan for the period of 20 years at 8.4 per cent rate of interest, the EMI that you would be paying would be approximately Rs. 68,000 per month. 

Now, let's say, you have an option to rent the same property by paying a rent of Rs. 20,000 per month. In this case, you will be left with Rs. 48,000 per month to invest in large cap equity mutual fund. The 3-year average rolling returns for the period of 10 years of the large cap funds is 12.68 per cent. If we consider that it will continue to give the same compounded annual growth rate (CAGR) for the next 20 years, then systematic investment plan (SIP) of Rs. 48,000 per month, along with a lump sum of Rs. 20 lakhs, will lead you to accumulate approximately Rs. 7 crores at the end of 20 years, which may be more than even what your property would be worth after 20 years. However, here we have assumed that the rent of property in the above illustration would remain constant throughout the period and, according to the above illustration, renting a house, rather than buying by leveraging your asset, seems to be more beneficial.

I want to invest money for the period of 3 months and was looking for a good ultra-short duration fund. How do I select good ultra-short duration fund?
- Darpan Singh

Ultra-short duration funds are suitable for investments that need to be made for few months. As per SEBI's re-categorization circular, ultra-short duration funds are those, which invest in debt and money market instruments, with Macaulay duration of 3 months to 6 months. 

Generally, ultra-short-bond funds give better returns than bank fixed deposits (FDs). Basically, these funds stay away from the equity market and only invest in bonds, with a maturity period of 3 months to 6 months, and this is why they can get some sort of predictable returns; however, not a guaranteed one. Following is the category returns of the ultra-short duration fund across a period to gauge the returns that you can expect from it. Nonetheless, you can ignore the returns provided in the long term, as you want to invest only for a period of 3 months. However, there are times when you would wish to invest in a fund for safety purpose, which can provide better returns than bank FDs. In such a case, knowing how it will perform in the long run is important.

There are two factors to look at while investing in them, which are explained below: 

Returns : Many people select funds that have provided better returns. However, while investing in ultra-short duration fund you need to do exactly the opposite. This means that you need to avoid investing in the funds with the highest returns. This is because if the fund is giving highest returns then there are high chances that it might be taking risk, which is not required for the investment horizon of 3 to 6 months. So, there might be chances of loss there. For investing in a fixed income for a short span of time, you should avoid any sort of unnecessary risk. Even you should check the Yield to Maturity (YTM) of the fund. Higher the YTM, higher the risk that fund is carrying. 

Expense ratio : Another thing to look at is the expense ratio of the fund. Higher expense ratio eats up your returns. This is why it is better to select a fund with the lowest possible expense ratio. On the contrary, you might also consider investing in the direct plan via the website of a fund house. Usually, for direct plans, the expense ratio is less than regular plans of the same fund in the range of 0.50 per cent to 0.75 per cent. So, investing in direct plan would necessarily reduce the overall cost.