A home. That is what Shalini and Manish Mathur dream of owning in three years time. Tired of living in a rented flat, the double-income executive family in Mumbai cannot think of raising a family until they have a house to call their own. Manish, 30, is an executive in a transnational company while Shalini, 27, is a consultant with one of the international management consultants in the city. The couple is comfortably off, with a total income of Rs 75,000, and an investible surplus of Rs 45,000 a month. But with a decent flat in the western suburbs of the city likely to cost them Rs 50 lakh, the duo cannot venture out without a housing loan. A Rs 50-lakh housing loan would, however, bring an equated monthly instalment of Rs 60,000 in tow. A combination of savings and loans appears to be the only solution, but their savings must grow to reduce the amount they borrow. Having picked their brains, the couple consult Vijay, a friend and an investment advisor in a bank. What would Vijay suggest?

THE FAMILY: They are quintessential DINKs -- double income and no kids -- and they have a suburban dream. Meet Manish Mathur, 30, a senior marketing executive in a transnational consumer goods company, and his wife, Shalini, 27, a senior consultant at one of the largest global management consultancy companies in Mumbai. Their ardent aspiration: to own a flat in Mumbai in the next three years and, only after that, raise a small family.

It's not too ambitious a goal as the Mathurs already have a total monthly income of Rs 75,000, which generates an investible surplus of Rs 45,000 per month. The only issue: how should the Mathurs plan their investments so that they are able to buy their first home without sacrificing their lifestyle?

THE EQUATION: According to Manish's estimates, given the dynamics of the property market, a three-bedroom flat in the western suburbs of Mumbai should cost them Rs 50 lakh three years from now. But the Mathurs are rather concerned about immediately taking on a very large housing loan. For instance, to service a Rs 50-lakh loan, the couple knows it must budget for the repayment of Equated Monthly Instalments (EMIs) of Rs 60,000 per month -- which would slice off almost all their present monthly disposable income. Their strategy is to save as much as possible in the next three years so that the loan -- and, therefore, the EMI -- gets pared to a more manageable figure.

In any case, Shalini is quite firm about not committing more than Rs 45,000 a month towards the repayment of the loan. Her reasoning: pay-hikes over the next three years will be consumed by inflation, higher spending, and savings for contingencies. Which is why, she argues, they should not be factored into the house-savings plan. When Manish made a telephone call to a housing finance company, he discovered that an EMI of Rs 45,000 would secure them only a loan of between Rs 30 lakh and Rs 35 lakh -- not enough to purchase the kind of flat the Mathurs were interested in.

On the other hand, a monthly saving of Rs 45,000 would add up to Rs 16 lakh in 36 months -- a neat nest-egg to start the housing project with. On the eve of their second wedding anniversary, therefore, Shalini and Manish decided three things for themselves. First, invest Rs 45,000 a month in a secure instrument since a cumulative investment of Rs 16.20 lakh could, for example, appreciate to Rs 20 lakh over the period. Second, club this with a Rs 30 lakh housing-loan to raise the Rs 50 lakh needed to buy their flat. And, finally, meet the monthly loan repayments of Rs 40,000-45,000 a month out of their disposable surplus -- without suffering any loss in their standard of living.

To reach the magical Rs 20 lakh, Manish was tempted to invest at least a part of their savings in the stockmarket. But Shalini was not entirely convinced. She did not believe in sinking ''serious'' money -- money she couldn't afford to lose -- in risky equity-related investments. So, the Mathurs compromised: they decided to invest their monthly surplus of Rs 45,000 in low-risk instruments, and all the subsequent surpluses from their pay-hikes in equity in order to finance the home.

THE STRATEGY: Once their goals were charted out, Shalini and Manish began worrying about the kind of instruments they would need to invest in. That's when they decided to consult an old friend, Vijay, who was now an investment advisor in a bank.

His first choice as a vehicle for the Mathurs to park their savings in was a bond fund. Essentially, explained Vijay, these are mutual fund schemes that invest primarily in debt products: non-convertible debentures and bonds, or privately-placed bonds. As 0 to 5 per cent of their corpus is invested in equity, the bond funds do not display the volatility associated with stocks. Moreover, by buying into a bond fund, risks are spread over a portfolio of bonds. By buying into two or three bond funds, an investor can actually diversify his, or her, risks quite well, said Vijay.

But Manish was warned to buy only into a fund that is open-ended, discloses its Net Asset Value (NAV) every day, and publishes its portfolio at least once a quarter. An open-ended bond fund would allow the Mathurs to enter or exit the scheme whenever they wished at NAV-based prices. That's when the Mathurs realised that they would have to look for a growth plan -- where no dividends would be declared, but the NAV would keep appreciating.

Manish was still not certain about the returns. For instance, he wondered, if they bought units at, say, Rs 10, and the scheme appreciated, say, by 13 per cent in a year, would they be able to sell their units at Rs 11.30, and realise a 13 per cent yield? Was it really as simple as that? Vijay was quick to point out that there were other benefits too: a growth plan would also offer the twin benefits of lower tax-rates and inflation indexation. Manish' interest was piqued and, excitedly, he began crunching the numbers.

He found that in the case of a 13 per cent appreciation on a Rs 10-unit, the per unit gain of Rs 1.30 would be treated by the tax-man as a long-term capital gain, which would thus be subject to a tax-liability of only 20 per cent as compared to the 30 per cent tax-bracket in which the Mathurs' salary fell. Moreover, while computing their capital gains, the cost would be indexed upwards for inflation to arrive at the inflation-adjusted capital gains.

Assuming a rate of inflation of 5 per cent for the year, the tax computation would be: Sale Price (Rs 11.30) - Adjusted Cost (Rs 10.50) = Taxable Profit (Rs 0.80). At a tax-rate of 20 per cent, the tax-liability would then be just Rs 0.16. And the post-tax return would be Rs 11.30 - Rs 0.16 = Rs 11.14. Or 11.40 per cent. Vijay pointed out that looking at the sums another way, if the Mathurs were to seek a 11.40 per cent post-tax return from a normal interest-bearing instrument, they would need to hunt for a pre-tax yield of 16.20 per cent, on which they would pay a 30 per cent tax and net an appreciation of 11.40 per cent. And where, asked Vijay with a laugh, would the Mathurs find a return of 16.20 today?

Shalini then wanted to know how such a bond fund worked. Vijay quickly reassured her that it would be quite convenient for the Mathurs to manage their investments in such a scheme as most bond funds have a Systematic Investment Plan (sip), which requires an investor to put away a fixed amount every month for as long as she wanted to. He asked the Mathurs to opt for an sip with, ideally, three different funds, putting away Rs 15,000 per month in each scheme. All they would then need to do would be to issue standing instructions to their bankers to periodically invest these sums, and, thus, spare them any operational responsibilities.

Finally, Manish ran a check with Vijay, and discovered that if the funds were to yield a return of 13 to 14 per cent per annum, the couple would have between Rs 18 lakh and Rs 19 lakh net of all taxes in 36 months. Which fitted in fine with their masterplan. Vijay asked him to choose the more stable funds by analysing the fluctuations in week-on-week returns. As the Mathurs readied to leave, Vijay winked and offered to set up the accounts for Shalini and Manish at his bank. The Mathurs beamed. 

\Money Minder's Mailbag | Stocktalk | Superscrips|   Mutual Monitor |Contrarian