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Buying a car could be one of the biggest expenses you make outside of buying a home. Buying a vehicle is usually a short-term goal for many, and you can finance the purchase with a car loan. If you plan to buy a car after three years, start saving a certain amount for a down payment. To maximize the down payment amount, should you invest in short-term equity? Let’s take a look at how investing in stocks may or may not help you plan your short-term financial goal.
Raj Khosla, MD, MyMoneyMantra.com said, âYou shouldn’t be using equity to save for your car in as little as three years. Equity returns can be volatile in the short to medium term, and you could end up losing money. “
If you want to buy a car worth â¹15 lakh after three years you have to start saving â¹10,000 per month as of today. In such a situation, if you are investing money in stocks to accumulate enough wealth for a down payment, you need to understand the implications of investing in stocks for the short term.
If we take scenario 2, you will have approximately â¹3.9 lakh after three years with a 5% return on your monthly investment of â¹10,000. If the equity share is doing better, you might get a little more. The balance of â¹13.5 lakh can be financed with a car loan. The five-year EMI is â¹28,000, assuming the interest rate is 9%.
Anup Bansal, Director of Investments at Scripbox, said: âYou can consider prepaying the loan after a few years if there is growth in your savings or if your regular investments also increase at a higher rate. There will be a prepayment charge, usually a small percentage of around 1% of the principal unpaid portion of the loan. There are no tax advantages to a car loan, so prepayment is always advised. “
What you should do
âWhen you are considering buying a car in the short term, the best bet is a recurring deposit in a bank or a SIP in a debt or hybrid fund,â Khosla said. Assuming an after-tax return of 5%, you will have roughly â¹3.9 lakh in three years. Invest the same â¹10,000 in equity funds could give him around â¹4.18 lakh if ââthe returns are 10%, but there is also a possibility that the market will go down and the corpus will be lower than the â¹3.6 lakh main investment.
Thus, it should be understood that equity investments are intended for long term goals that are more than 5 to 7 years away. This is how you don’t get caught up in a bear market cycle and have to sell your distressed assets because of a target requirement.
Bansal said, âThe best way to manage short-term goals is to use investments that are lower volatility and are easier to liquidate. Consider a small equity allocation in the range of 10-20% of the required short-term goal value. However, a high percentage, such as 100% equity investment for 3-5 year goals, is not recommended. “
Short-term goals can be broken down into quarterly, monthly, weekly, and daily goals. Therefore, you need to manage these goals by investing in a combination of liquid funds, bank Flexi FD and bank savings account.
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