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Should you save in equity to buy a car in the short run?

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Purchasing a car could be one of the most considerable expenses you make apart from buying a home. Buying a vehicle is usually a short-term goal for many, and you can fund the purchase with a car loan. If you plan to buy a car after three years, start saving some amount to make a down payment. To maximise the down payment amount, should you invest in equity in the short run? Let’s see how investing in equity may or may not help you plan your financial goal in the short run.

Raj Khosla, MD, MyMoneyMantra.com said, “You should not use equity funds to save for your car with a time frame as short as three years. Equity returns can be volatile in the short and medium-term, and you could well end up losing money.”

If you want to purchase a car worth 15 lakh after three years, you have to start saving 10,000 per month from today. In such a situation, if you invested the money in equity to accumulate enough wealth for a down payment, you need to understand the implications of investing in equity in the short run.

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If we take scenario 2, you will have around 3.9 lakh at the end of three years with a return of 5% on your monthly investment of 10,000. If the equity portion does better, then you may have a little more. The balance of 13.5 lakh may be funded through a car loan. The five years EMI is 28,000, assuming the interest rate as 9%.

Anup Bansal, chief investment officer, Scripbox said, “You may consider prepaying the loan after a couple of years if there is a growth in your savings or your regular investments also grow at a higher rate. There will be a prepayment fee, typically a small percentage of around 1% of the outstanding principal portion of the loan. There are no tax benefits of a car loan, so prepayment is always advisable.”

What you should do

“While planning to buy a car in the short-run, the best bet is a recurring deposit in a bank or a SIP in a debt or hybrid fund,” said Khosla. Assuming a post-tax return of 5%, you will have roughly 3.9 lakh in three years. Investing the same 10,000 in equity funds could give him about 4.18 lakh if the returns are 10%, but there is also a possibility that the market falls and the corpus is lower than the 3.6 lakh principal investment.

Thus, one must understand that equity investments are meant for long-term goals which are more than 5-7 years away. This is so one does not get caught in a downward market cycle and have to sell their holdings in distress because of a goal requirement.

Bansal said, “The best way to manage short-term goals is through investments that have low volatility and are easier to liquidate. One may look at a small allocation to equity in the range of 10-20% of the required short-term goal value. However, a large percentage, such as a 100% equity investment for 3-5 year-long goals, is not recommended.”

Short-term goals can be divided into quarterly, monthly, weekly, and daily goals. Hence, you must manage such goals by investing in a combination of liquid funds, bank Flexi FD and bank savings account.

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